Impact of 100% FDI in Insurance Sector - An analysis

The insurance sector has received close to Rs 54,000 crore as foreign direct investment (FDI) in the last 9 years on the back of further liberalization of overseas capital flow norms by the government, Financial Services Secretary Vivek Joshi has said a few months before. The government increased the permissible FDI limit from 26 per cent in 2014 to 49 per cent in 2015 and then to 74 per cent in 2021. ?However, he said, the permissible FDI limit for insurance intermediaries was increased to 100 per cent in 2019.

Debasish Panda, the chairperson of the Insurance Regulatory and Development Authority of India (IRDAI), has advocated for 100% foreign direct investment (FDI) in the insurance sector. Before the nationalization of the insurance sector in India, foreign companies were indeed operating in the country. Several foreign insurance companies like Royal Insurance Company (UK), Sun Life Assurance Company of Canada, Prudential Insurance Company (UK-based) had a presence in India, particularly in life and general insurance, catering to the Indian and expatriate populations. It would not be an exaggeration if we say that these foreign players contributed to the development of the Indian insurance sector by introducing various insurance products and practices.

Allowing 100% Foreign Direct Investment (FDI) in the Indian insurance sector can be transformative but also poses specific challenges. While 100% FDI in insurance has the potential to bring much-needed capital, global expertise, and innovation, it also poses unique challenges for the Indian insurance sector, which has yet to adopt RBC and IFRS 17 frameworks. Foreign insurers can play a valuable role in bridging gaps in technology and expertise, but this must be managed carefully with a focus on ensuring that domestic insurers remain competitive, profits are reinvested locally, and underserved markets are addressed. Regulatory safeguards are essential to balance foreign and domestic interests, maintaining a sustainable and inclusive growth trajectory for the Indian insurance sector as it prepares for an eventual transition to RBC and IFRS 17.

?Some of the positives on allowing 100% FDI in GI Sector are as below:

1.?? Market Discipline

?Beyond capital, foreign insurers bring advanced technical expertise in risk management, underwriting, and financial reporting, honed under RBC and IFRS 17 standards. The premium may be charged commensurate to the risk exposure. Many insurers have minimum premium standards for underwriting certain risks. Though more players may fuel more competition, I feel it may eventually become a healthy competition bringing in market discipline. While India’s solvency regime is not yet risk-based, foreign expertise can pave the way for a smoother transition to RBC, as foreign players share best practices and elevate industry standards. IFRS 17 knowledge, in particular, can help local insurers prepare for future reporting changes, promoting transparency and consistency that align with global practices. This alignment could improve the credibility of India’s insurance sector in international markets and increase its appeal to foreign investors.

?2.?? Product Innovation and Customer-centric approach

?With increased foreign participation, consumers are likely to benefit from a wider range of products and services tailored to emerging risks such as cyber threats, climate change, and pandemic-related exposures. Foreign insurers’ experience with diverse risk types can foster product innovation and bring solutions that address specific gaps in the Indian market. By broadening consumer choice, this expansion of product offerings could significantly improve insurance penetration. But again, foreign insurers may also focus their operations on profitable urban markets, where insurance penetration is higher, neglecting rural regions that remain underserved. Such an urban-focused strategy could widen the existing coverage gap and hinder progress toward inclusive growth in the sector.

?3.?? Technological Advancement and Digitization

Another advantage of opening the insurance sector to 100% FDI is the potential for technological advancement and digital transformation. Foreign insurers often utilize cutting-edge technologies in data analytics, digital platforms, and risk assessment, which can streamline operations and improve customer experiences. Enhanced digitalization could lower ‘operational costs’ and increase accessibility, benefiting consumers and supporting efforts to extend insurance services to underserved areas. Advanced analytics could also drive better risk assessment and product customization, ensuring insurers can meet the evolving needs of a diverse customer base.

4.?? Long-Term Development

Moreover, the entry of foreign players brings opportunities for long-term sectoral development and skill transfer. Foreign companies often invest in local talent through training programs, transferring specialized skills in areas such as actuarial science, compliance, and risk management. These efforts can help build a highly skilled workforce prepared for the eventual transition to RBC and IFRS 17, fostering a more resilient and capable insurance sector.

Allowing 100% FDI in Insurance is not without any cons.? Some of the challenges I perceive are:

1.?? Pressure on Domestic Players

Given the reliance on a simpler solvency regime, Indian insurers may struggle to compete with foreign players who have sophisticated risk management frameworks. This could lead to market consolidation, as smaller insurers may lack the resources to compete, potentially reducing market diversity and choices for consumers. The best talents may be picked by the foreign players and domestic insurers may be deprived of talented resources.

2.?? Regulatory and Compliance Challenges:

Foreign insurers accustomed to Solvency II and IFRS 17 standards may face challenges aligning with India’s factor-based solvency rules and local accounting standards. This disconnect could create friction between regulatory expectations and company practices, leading to potential compliance and operational complexities until India fully transitions to RBC and IFRS 17. Besides India is operating on Financial Year reporting basis whereas many countries use Calendar Year reporting. So, the foreign players may need to prepare two sets of accounts one to comply with their parental organization and another comply with Indian standards.

3.?? Risk of Urban-Focused Strategies:

Foreign insurers may concentrate on profitable urban areas with higher insurance penetration, neglecting underserved rural markets. This urban-centric approach could exacerbate the existing coverage gap and counteract efforts to improve insurance accessibility across all segments.

4.?? Risk of Market Dominance by Large Players:

With the potential for large foreign insurers to dominate, smaller domestic players could be squeezed out, reducing competition over time. This concentration could lead to oligopolistic behavior, impacting premium rates and consumer choice if dominant players prioritize profit over market development.

Foreign firms may withdraw or scale down in emerging markets during global financial crises, particularly in markets where profitability is challenged by strict regulatory requirements. This could bring in volatility and introduce instability, affecting market confidence and policyholder security.

5.?? Challenges in Profit Repatriation and Retained Earnings.

The repatriation of profits by foreign companies might limit reinvestment in the local market. While local insurers often retain profits to grow their capital base, foreign firms may not prioritize local expansion as much, potentially slowing down the sector's development and contributing to economic outflows.

6. Taxation of Companies

Currently the FRBs are branches of foreign companies and are charged at the rate of 35%. But when a company gets registered in India under Indian Companies Act, it be treated as a domestic company for taxation purposes. But dividend payment and repatriations may have different provisions.

In conclusion, allowing 100% FDI in India’s insurance sector has significant potential benefits, with foreign insurers playing a pivotal role in modernizing the industry and preparing it for eventual transitions to RBC and IFRS 17 standards. However, the challenges posed by increased competition, profit repatriation, regulatory alignment, and the risk of market concentration require a balanced approach. Regulatory safeguards, such as promoting fair competition, encouraging local reinvestment, and prioritizing inclusive growth, are crucial for maximizing the benefits of foreign investment while ensuring the long-term sustainability and resilience of India’s insurance industry.

#100% FDI Insurance Sector #foreign companies

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