INSURANCE AMENDMENT ACT 2021

In a recently passed amendment to the Indian Insurance Companies (Foreign Investment) Rules, 2015, the parliament accentuated the foreign direct investment limit from 49% to 74% in the insurance sector. The Insurance (Amendment) Act of 2021 also abrogates the restrictions regarding contentious foreign ownership which were introduced in 2015 which had fended the much-coveted inflow of foreign investors into the sector. The gazette describes total foreign investment about an Indian insurance company as the sum of a total of indirect and direct investment done by the foreign investors in a certain company and is calculated taking into account the specifications and regulations made by the authority regarding registration of insurance companies of India which is the Insurance regulatory and development authority. It is expected to benefit around 23 private life insurance companies and 21 private non-life insurance companies along with 7 specialized private health insurance companies.

The reasoning provided behind this decision is that the post-covid world is a completely different one and the economies are shrinking owing to it and in these times we are in dire need of foreign investments. This will also lead to enhancement of job opportunities, social protection and insurance spiking in the sector which is important because at the lookout insurance is one such sector that has a long gestation period and takes a certain amount of years even to receive a breakthrough and foreign aid will mean receiving capital from the companies which specialize in this division and provides capital called as the ‘patient capital’ which will abet burgeoning of small independent companies. India’s insurance sector even though possessing great potential due to digitization remains abysmally under-utilized at a rate of 3.76% whereas the global average spikes to 6% and this are what it aims to abridge through this new amendment in its policy.

This new inflation in the FDI will also have additional benefits like enabling the previous foreign investors to become a part of their joint ventures in India like those of ICICI, HDFC, Bajaj alliance etc. The paramount benefit from this step will be derived by the consumers of insurance policies because this opportunity will lead to more companies and new people venturing into the insurance market which will therefore increase the competition between the existing and new players in the market which may lead to a reduction in prices and increasing benefits for the consumers. It is a proven fact even in the past that competition has played a big role in regulating the big markets such as those of the insurance market. And this will also give the chance to the private companies a fair playing field because a lot of new opportunities will be up for grabs. After all, right now the state-owned company LCI life corporation of India controls the stakes by owning about 70% of the insurance market in India but an increase in FDI may lead to the opening up of many joint ventures benefitting the sector and the people of the country and lead to bringing on more transparency, more competency, more efficiency and more credibility to the market.

This amendment along with the hike to 74% also announced certain safeguards like 50% directors of the company should be independent owners (in the case of its chairperson of the board not being independent) and in case that the chairperson of the board is independent then too the board will need to comprise of at least one-third of independent directors but this is applicable only in the scenario where a company consists of more than 49% of foreign investors. The majority of key managerial positions like directors etc. should now compulsorily be owned by resident Indians; it also makes it compulsory that at least one of the board chairperson, the managing director and the CEO, are "Indian citizens". These are done to protect the interest of the country’s people but it also removed some statutory caps like the compulsory ownership and control of the company by a resident Indian, owing to the publication of a draft which proposed amendments to the Indian Insurance Companies (Foreign Investment) Rules, foreign entry into the insurance field is presumed to increase multifold. Furthermore, It also instructs the companies to keep aside a definitive per cent (around 50%) of their earned profits in form of a ‘general reserve if in that particular financial year their solvency margin is less than 1.2 times the solvency control level or that they have been required to pay a dividend on their shares of equity.

This is done to meet the adequacy and liquidity of capital needs of the company and preserve security status to face challenging situations which will enhance the policy holder’s confidence in the company. It is done keeping in mind the global financial crisis of 2008 where many global insurance giants were forced to withdraw their capital from various European and Asian markets following a dearth of capital. The government reiterated section 27E insurance act will continue its applicability. This section makes it clear that any insurance company with any amount of foreign shareholding irrespective of it can invest any amount of policy holder’s money outside of India.

The route of implementation is still anticipated whether it will be implemented independently or through government intrusion. It is a big step towards innovation in the insurance sector even though questions regarding dividend related provisions, restrictions of international investors, factoring valuation etc. continue to ponder which can all be answered by the revelation of new guiding principles which will highlight the amendments made to the NDI and FDI policy and recession of old IOC guidelines. Even though it will need some legislative changes to function smoothly, this step is in favour of the insurance sector and should be complied with accordingly.