NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

ECONOMICS - 3 PROJECT ON

FDI in Insurance Sector

SUBMITTED TO: SUBMITTED BY:

MR. RAJESH KUMAR GAUTAM ARPIT SHIVHARE

ROLL NO.-2014BALLB04
 ACKNOWLEDGEMENT

I would like to begin with acknowledging our Professor RAJESH GAUTAM

who gave us this opportunity to work on a project work, giving us full autonomy to
choose our topics as well as guidance where ever needed.

I would also like to thank the director of the university and the administration who
have given us all the requisite facilities like library, wi-fi connection, computer lab,
photo stat which make the task much easier and efficient.

Also, I would like to extend my gratefulness to my batch mates and parents who
have supported me throughout in this endeavor.

Arpit Shivhare

2014 B.A., LL.B (Hons.)04

 TABLE OF CONTENTS

TOPIC PAGE NO.

1. STATEMENT OF PURPOSE ........................... .............................. .4

2. INTRODUCTION............................................................................ .5
3. FDI ............................................................................................. 6
4. LITERATUTRE REVIEW ............................................................ .7
5. INSURANCE REGULATIONS IN INDIA........................................ 9
6. MILESTONES IN INSURANCE REGULATION ............................ .10
7. CURRENT TRENDS IN THE INSURANCE SECTOR..................... 11
8. LEGAL OBJECTIVES ABOUT FDI IN INSURANCE.................... . 12
9. SWOT ANALYSIS OF FDI IN INSURANCE............................... 13
10. SUGGESTIONS...............................................................................15
11. CONCLUSION............................................................................... 16
12. REFRENCES ........................................................................... 16
13. BIBILOGRAPHY ....................................................................... .16

STATEMENT OF PURPOSE
India is the third most attractive foreign direct investment destination in the world.

The Indian insurance companies offer a comprehensive range of insurance plans.deu to growing
demand for insurance ,more and more insurance companies are now emerging in the Indian
Insurance sector . the present project aims to study the pattern of FDI in insurance sector and
government regulation in the said sector. The project studies current trend in insurance sector ,
the challenges and the prospects ahead.

This project also covers the journey of the insurance sector in India and how it emerge as one of
the growing investment hub of the country.

RESEARCH QUESTIONS

Why the Government raised the FDI cap in Insurance sector?

What role FDI is playing in the growth of Indian Insurance sector?

OBJECTIVES

To understand the infrastructure of Indias Insurance sector.

To analyze the strength, weakness and future perspectives of Indias insurance sector
along with the role of FDI in it.

INTRODUCTION:

Insurance sector in IndiA

The economic reforms initiated in the early 90s paved the way for the growth and opening up of
the financial sector, which led to a sustained period of economic growth. The insurance industry
was opened up for private players in 2000, and has seen tremendous growth over the past decade
with the entry of global insurance majors. India is fast emerging as one of the worlds most
dynamic insurance markets with significant untapped potential.

The insurance sector plays a critical role in a countrys economic development. It acts as
mobilize of savings, a financial intermediary, a promoter of investment activities, a stabilizer of
financial markets and a risk manager. The life insurance sector plays an important role in
providing risk cover, investment and tax planning for individuals; the non-life insurance industry
provides a risk cover for assets.

Health insurance and pension systems are fundamental to protecting individuals against the
hazards of life, and India, as the second-most populous nation in the world, offers significant
potential for that type of cover. Furthermore, fire and liability insurance are essential for
corporations to safeguard infrastructure projects and investment risks. Private insurance systems
complement social security systems and add value by matching risk with price.

Type of NOS OF PUBLIC NOS OF PRIVATE TOTAL

Business SECTOR SECTOR
COMPANIES COMPANIES

Life insurance 1 24 25
general insurance 4 27 31
reinsurance 1 - 1
total 6 51 57

Foreign direct investment

Foreign direct investment (FDI) is a direct investment into production or business in a country
by an individual or company in another country, either by buying a company in the target country
or by expanding operations of an existing business in that country. Foreign direct investment is in
contrast to portfolio investment which is a passive investment in the securities of another country
such as stocks and bonds

The investing company may make its overseas investment in a number of ways - either by setting
up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas
company, or through a merger or joint venture.
The accepted threshold for a foreign direct investment relationship, as defined by the OECD, is
10%. That is, the foreign investor must own at least 10% or more of the voting stock or ordinary
shares of the investee company.

An example of foreign direct investment would be an American company taking a majority stake
in a company in China. Another example would be a Canadian company setting up a joint
venture to develop a mineral deposit in India.
 LITERATURE REVIEWS

1. ECONOMIC TIMES ( july 18, 2013); in its article about increase in FDIin insurance
revealed that There are two reasons why India is raising the permissible limits on FDI in various
sectors. One is evolutionary: as the economy matures and learns, the earlier caution that either
prevented or limited FDI inflows is replaced by confidence.

The second reason is necessity: the government reckons that FDI inflows are more stable than
money that ebbs and flows in equity markets. Today, with a current account deficit close to 5%
of GDP and export markets looking weak, freer FDI inflows offer one way of attracting long
term capital. Raising the ceiling is a good idea

Further in its work, they said If foreigners are willing to supply a portion, why stand in the way?
In fact, foreigners might want 51% rather than 49%, to find Indian insurance appealing. The
sector will function as per Indian regulation. What, then, is the problem with a 51% stake?

CONCLUSION- Insurance is an industry that requires lots of capital to expand, particularly in

the life segment. Prudential norms prescribed by the regulator call for capitalization that goes up
as premium collections go up. For the insurance industry to continue to grow in underinsured
India, it needs lots more capital.

2. BUSINESS LINE ( 19 JULY, 2013); in its article about increase in fdi in insurance
revealed that The FDI hike in insurance will bring in capital inflows to the tune of around $4-5
billion over three years and thereafter saturate, particularly for the life insurance industry,
further in its work they said The FDI increase will allow insurance companies to go for an IPO,
as most foreign partners would not want to dilute their stakes,

CONCLUSION- increasing the limit of FDI will give sufficient boost to the market and will
somewhat help to over come the crisis
3. RAJAN RAGHURAM( 17 JULY;2013); in his article about increase in fdi in insurance
revealed that India will be able to manage the CAD problem if it were to continue looking for
stable sources of financing FDI, long-term equity investments, sovereign wealth funds and
long-term pension funds. And further revealed that There was a need to think about other sources
of financing and remove impediments so that more FIIs (foreign institutional investors) are
attracted,

CONCLUSION AS THE CURRENT ACCOUNT DEFICIT of the country is very high and
which needs to be reduced as early as possible and for that there is immediate need to increase
FDI in insurance as well as in different sectors

4.THE HINDU (5 OCT.;2012) in its article revealed that These amendments are aimed at
removing archaic and redundant provisions in the legislations and incorporating certain
provisions to provide the Insurance Regulatory Development Authority (IRDA) with flexibility
to discharge its functions effectively and efficiently. And further revealed that

The overall objective is to further deepen the reform process which is already underway in the
insurance sector, an official statement said here.

CONCLUSION-THE HINDU article most of the time talked about autonomy of public
insurance policy companies and this increase in FDI would bring much more competition in the
market

5. TIMES OF INDIA (17 JULY ,2013) in its article revealed that Noting that the Centres
argument of industry seeking foreign investments was baseless and in the last 11 years the
insurance sector attracted only Rs 6,831 crore of foreign investments they further added During
the 11th Five Year Plan, the Life Insurance Corporation (of India) has made contributions of Rs
7.04 lakh crore to the Government and in the last 11 years, the dividend amount that was
presented to the Centre by LIC was Rs 7,848 crore, higher than the foreign direct investments
received by this sector

CONCLUSION- times of India exposed the drawbacks of FDI in investment that it is nt always
necessary that FDI would bring development.
 INSURANCE REGULATION IN INDIA

Insurance in India started without any regulations in the nineteenth century

After the independence, the Life Insurance Company was nationalized in 1956, and then
the general insurance business was nationalized in 1972

Only in 1999 private insurance companies were allowed back into the business of
insurance with a maximum of 26 per cent of foreign holding (World Bank Economic
Review 2000).

Insurance in India used to be tightly regulated and monopolized by state-run insurers.

The Insurance Regulatory and Development Authority (IRDA) Act of 1999

was passed

The insurance business was opened on two fronts

Firstly, domestic private-sector companies were permitted to enter both

life and non-life insurance business

Secondly, foreign Companies were allowed to participate, albeit with a cap on

shareholding at 26%

Since its inception IRDA has been taking steps to promote insurance sector and also
protect interest of people

A number of reforms have been introduced by IRDA regarding regulation of agents,

deciding about premium, marketing strategies etc
 MILESTONES OF INSURANCE REGULATIONS IN THE 20TH
CENTURY

1912 First piece of insurance regulation promulgated Indian Life Insurance Company
Act, 1912

1928 Promulgation of the Indian Insurance Companies Act

1938 Insurance Act introduced, the first comprehensive legislation to regulate insurance
business in India

1956 Nationalization of life insurance business in India

1972 Nationalization of general insurance business in India

1993 Setting-up of the Malhotra Committee

1994 Recommendations of Malhotra Committee released

1995 Setting-up of Mukherjee Committee

1996 Setting-up of an (interim) Insurance Regulatory Authority (IRA)

1997 Mukherjee Committee Report submitted but not made public

1997 The Government gives greater autonomy to LIC, GIC and its subsidiaries with
regard to the restructuring of boards and flexibility in investment norms aimed at
channelizing funds to the infrastructure sector

1998 The cabinet decides to allow 40% foreign equity in private insurance companies
26% to foreign companies and 14% to non-resident &investors (FIIs)
 1999 The Standing Committee headed by Murali Deora decides that foreign equity
in private insurance should be limited to 26%

The IRA Act was renamed as the Insurance Regulatory and Development Authority
(IRDA) Act

1999 Cabinet clears IRDA Act

2000 President gives assent to the IRDA Act

2013 parliament decides that foreign equity in insurance should be 49%

CURRENT TRENDS IN INSURANCE SECTOR

Life Insurance is the fastest growing sector in India since 2000 as Government allowed Private
players and FDI up to 26% and recently Cabinet approved a proposal to increase it to 49%.

India is the third most attractive foreign direct investment destination in the world. The Indian
insurance companies offer a comprehensive range of insurance plans. Due to the growing
demand for insurance, more and more insurance companies are now emerging in the Indian
insurance sector. The present paper aims to study the pattern of FDI in Insurance Sector and the
Government regulation in the said sector. The paper studies current trend in Insurance sector, the
challenges and the prospects ahead.

The Insurance Amendment Bill to raise FDI cap in the insurance industry from 26 per cent to
49 per cent has been pending in the Rajya Sabha since 2008. India is full of potential but hit by
regulatory hurdles, a sharp dip in GDP growth and uncertain market conditions. Even though
current norms allow FDI up to 26 per cent, several foreign players have quit India. The hike in
FDI cap is subject to parliamentary nod, not an easy task given that the ruling coalition is in a
minority. At present foreign investment in private insurance companies is restricted to 26% of
their capital, which is now proposed to be increased to 49% by passing an amendment to the
Insurance Act. The reform if it gets passed in Parliament will be big boost the industry.
According to industry observers, a lot of international companies have been waiting to enter
India and a further opening up of the sector will give them an entry point. Bill to raise FDI cap
in the sector is pending in the Rajya Sabha for approval. Application needs to be approved by
two levels at Automatic Approval - by the country's Central Bank, the Reserve Bank of India
(RBI), Mumbai and subject to obtaining license from IRDA.

LEGAL OBJECTIVES ABOUT FDI IN INSURANCE

Keeping FDI cap outside the law will also help in providing a dynamic and easy policy The
legislative framework in our country is that there is a primary law that lays down principles and
macro policy objectives, and then there are rules framed by the government under the provisions
of that law. Finally, there are regulations made by the sector regulator.
In this scheme of things, FDI limit should not fall within the scope of the primary law, but should
be within the scope of subordinate laws. In any case, parliament retains control, as rules and
regulations are required to be placed in the Parliament, and can be debated, thereby influencing
government policy.

instrument to the government to address several key issues such as increasing the availability of
long-term funds for infrastructure projects, encouraging capital inflow from overseas to stabilize
capital markets and also promoting financial inclusion. It will also provide financial and human
resources for spreading consumer education, and increase the awareness for retirement savings.

To further these objectives, it would, in fact, be desirable to increase the FDI limit in the pension
and insurance sectors to at least 49%. There appears to be no overwhelming reason as to why the
FDI limit in pension and insurance sectors should be limited to 26%, when in the rest of the
financial sector, it is higher than even 49%. Government could also consider allowing pension
funds to invest a portion of their corpus overseas for better returns and risk containment.
 SWOT ANALYSIS OF THE INDIAN ECONOMY IN INSURANCE
SECTOR

The present increase in FDI would benefit Indian economy

There are vast opportunities in Indian market both for domestic and foreign players

The insurance sector in India is slated to grow to beyond Seventy Billion Dollars by the
fiscal year 2013

Despite the formidable success achieved by LIC, the government has noted that only by
bringing in more FDI can they create an environment for Investment in insurance by the
average middle class Indian and otherwise

1. strength

A range of new products had been launched to cater to different segments of the market,
while traditional agents were supplemented by other channels including the Internet and
bank branches

These developments were instrumental in propelling business growth, in real terms, of

19% in life premiums and 11.1% in non-life premiums between 1999 and 2003.

India has a large population with an increase in its per capita income

Indias middle income is rapidly increasing emerging as a profitable market

2. Weakness

A key challenge for Indias non-life insurance sector will be to reform the existing tariff
structure. From a pricing perspective, the Indian non-life segment is still heavily
regulated

Reinsurance is only provided by GIC

While the insurance business is highly concentrated in India, the share of foreign
companies is low

India is among the lowest-spending nations in Asia in respect of purchasing insurance

(China, which spent USD 36.3 per capita on insurance products & Indian spent USD
16.4)

Even after the liberalization of the insurance sector, the public sector Insurance
companies have continued to dominate the insurance market

In the long run, other forms of non-price competition like aggressive advertisement
wars are likely To lead to increasing costs, eventually harming the interests of the
consumers

3. opportunities

Indias improving economic fundamentals will support faster growth in per capita income
in the coming years, which will translate into stronger demand for insurance products

Strong growth can be sustained for 3040 years before the market reaches saturation

there is plenty of room for growth in personal accident, health and other liability classes

Rising household income and risk awareness will be the key catalysts to spurring more
demand for these lines of business in the future

Health insurance could potentially have an important role in driving insurance market
development forward

the largely underserved rural sector holds great promise for both life and non-life insurers

4. threats
 Between 1985 and 2003, economic losses in India due to natural catastrophes averaged
around USD 1.2 billion or 0.4% of GDP every year
Floods were the main peril, accounting for 40% of cumulative losses over the period,
followed by storms (35%) and earthquakes (20%)
strong growth prospects pose pressure on the industry, and the economy at large, to
better manage the exposure to natural perils
Questionable Reputation of the Foreign Partners
Price liberalization will be needed to improve underwriting efficiency and risk
management
International reinsurance

suggestions

To begin with, India needs to further liberalize investment regulations on insurers to

strike a proper balance between insurance solvency and investment flexibility

Furthermore, both the life and non-life insurance sectors would benefit from less invasive
regulations

In addition, price structures need to reflect product risk. Obsolete regulations on

insurance prices will have to be replaced by risk-differentiated pricing structures

There is huge untapped potential, for example, in the largely undeveloped private pension
market. At the moment, less than 11% of the working population in India is eligible for
participation in any formal old-age retirement scheme. Private insurers will have a key
role to play in serving the large number of informal sector workers.
 Price liberalization will be needed to improve underwriting efficiency and risk
management

International reinsurance

CONCLUSION
as there are both positive and negative aspects of increasing FDI in insurance but if we see the
current economic scenario of our country then there is urgent need of the economic reforms ;as
the increasing current account deficit and the rapidly falling value of the money has made
government to take these steps hopefully they turnout to be successful in our country.

REFERENCES -:

WWW.JSTOR .COM

WWW.IRDA.GOV.IN

WWW.LIC.NIC.IN

WWW.WIKIPEDIA.COM

WWW.FIPBINDIA.COM

BIBLIOGRAPHY-:

NEWS PAPERS

THE HINDU, TIMES OF INDIA ,ECONOMIC TIMES,

MAGAZINES

OUTLOOK ,FRONTLINE