In this article, Prateeksha Gupta discusses the effect of an increase in Foreign Direct Investment in the Insurance sector.

Let us start by understanding what Foreign Direct Investment exactly is.

Foreign Direct Investment would be a direct investment by any corporation in a commercial venture in another country.  It is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring businesses assets in other countries, such as ownership or controlling interest in a foreign company.

Foreign Direct Investment does not mean portfolio investment in which equities of the other company are being purchased, instead, it means the taking of effective control or at least substantial influence over the decision making of a foreign business.
Thus, FDI is the process whereby residents of one country acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country.
Broadly, foreign direct investment includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans”.

Now let us understand what Insurance is.

Insurance is an equitable transfer of risk of a loss , from one entity to another in exchange for payment. It is a form of risk management which primarily was used to hedge against the risk of an uncertain and contingent loss.

FOREIGN DIRECT INVESTMENT IN INDIA

Insurance in India is a growing and flourishing industry with both international and national players competing and growing at rapid rate together with Banking and Real Estate, it constitutes 12.9% of Gross Domestic Product (GDP) in India.

Insurance sector was liberalized in 2001. Even after the liberalization of the insurance sector, the public sector insurance companies have continued to dominate the insurance market. They were enjoying 90% of market share. FDI in Insurance sector would increase the penetration of insurance in India. FDI can meet India’s long term capital requirements o fund the buildings and infrastructures.

Aside from being a basic driver of monetary development, foreign direct investment (FDI) is a noteworthy wellspring of non-obligation budgetary asset for the financial advancement of India. Remote organizations put resources into India to exploit generally bring down wages, extraordinary speculation benefits, for example, charge exclusions, and so on.
The government administration has taken numerous activities as of late, for example, unwinding FDI standards crosswise over parts, for example, protection, PSU oil refineries, telecom, control trades, and stock trades, among others.

According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments India received during April – September 2016 rose 30 per cent year-on-year to US$ 21.6 billion, indicating that government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results.

During April – September 2016, India received the maximum FDI equity inflows from Mauritius (US$ 5.85 billion), followed by Singapore (US$ 4.68 billion), Japan (US$ 2.79 billion), (US$ 1.62 billion), and USA (US$ 1.44 billion).

Impact investments in India is expected to grow at a compound annual growth rate (CAGR) of 20-24 per cent to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015.1[1]

INSURANCE SECTOR IN INDIA

The insurance industry of India consists of 53 insurance companies of which 24 are in life insurance business and 29 are non-life insurers. Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. Apart from that, among the non-life insurers there are six public sector insurers.[2]

ROLE OF FDI IN INSURANCE SECTOR

The role of Foreign Direct Investment in the present world is noteworthy. It acts as a lifeblood in the growth  of the nations.  The wave of liberalization and globalization sweeping across the world has opened many national markets for the international  business.
Insurance sector has the capability to raise long term capital from the public as it is the only market in which people invest their money for a long period of time, say 30 years. An increase in FDI in insurance sector would indirectly be a boom for the Indian Economy.

INCREASE IN FDI

The Cabinet of Narendra Modi has approved the hike of the Foreign Direct Investment in the insurance sector from 26% to 49%. The Parliament has passed Insurance Laws (Amendment) Bill, 2015. It was first passed in Lok Sabha on 4^th March 2015 and later in Rajya Sabha on 12^th March 2015 which becomes an Act as soon as the President signs it.
The Amendment bill aims to bring improvement and revisions in the existing law relating to insurance business in India. Insurance Regulatory and Development Authority (IRDA) is in favor of an increase in foreign equity capital in insurance joint ventures.  The public sector insurance companies have been continuing to dominate the insurance market of the country.

The stock market has reacted positively to the news and the shares of Reliance Capital and Max India gained more than 4.5% in intra-day trade today. The higher FDI cap will immensely help the insurance sector which is extremely short on investments.[3]

BENEFITS OF INCREASE IN FDI

Listed below are some advantages from the increase of foreign direct investment in insurance sector in India from 26% to 49%.

1. Increased Insurance Penetration

With the number of population in more than 100 crores, India requires Insurance more than some other country. Be that as it may, the insurance penetration in the nation is just around 3 percent of our Gross Domestic Product as for general premiums endorsed every year. This is far less when contrasted with Japan which has a insurance penetration of more than 10 percent. Expanded FDI cutoff will fortify the current organizations and will likewise permit the new players to come in, thereby empowering more individuals to purchase life cover.

2. Level Playing Field

With the expansion in foreign direct investment to 49 percent, the insurance agencies will get the level playing field. So far the state claimed Life Corporation of India controls around 70 percent of the life insurance market.

3. Increased Capital Inflow

Most of the private sector insurance companies have been making considerable losses. The increased FDI limit has brought some much needed relief to these firms as the inflow of more than 10,000 crore is expected in the near term. This could go up to 40,000 crore in the medium to long term, depending on how things pan out.

4. Job Creation

With more cash coming in, the insurance agencies will have the capacity to make more employments to meet their objectives of wandering into under guaranteed advertises through enhanced framework, better operations and more manpower.

5. Favorable to the Pension Sector

If the pension bill is passed in the parliament then the foreign direct investment in the pension funds will also be raised to 49 percent. This is because the Pension Fund Regulatory Development Bill links the FDI limit in the pension sector to the insurance sector.

6. Consumer Friendly

The end recipient of this change will be basic men. With more players in this part, there will undoubtedly be rivalry prompting to aggressive quotes, enhanced administrations and better claim settlement proportion.

7. Benefit to the common man & actuaries being

More options from the foreign company (if the same was not already available with Indian). Also now since the capital is more than earlier, the Insurance company can diversify their sectors of Insurance (like Motor, Mortgage, Health etc). Take more risks than earlier since there is more money & more support. More competition leads to better offers, so better benefits for common man.

8. Effect on Economy

More Foreign capital flows into the Indian Economy. Also this more investment will lead to demand for Indian Rupee in International Money Market (Because one has to invest in Rupee in India), there by decrease in Rupee to Dollar rate of exchange. This to a common man will reduce the cost of Imported goods (since the exchange rate is low 1$=40Rs??). Also the Forex reserves will be maintained. As well the market speculation will also play an important role, leading to Sensex hike & better confidence in Business makers in India.  More business will lead to need risk protection & Insurance.

DISADVANTAGES IN THE INCREASE OF FDI

The following are some of the demerits if the FDI gets increased in the insurance sector:

1. Household organizations might expect to get their businesses being taken over by the foreign organizations.
2. Small scale organizations may fear that they might not be able to compete with the Multi National Companies and may therefore, be forced to vacate the market.
3. Such big foreign and Multi National organizations may not be interested in investing in the wages of the local people of the country. Instead they focus on investing more in the machinery, building, and intellectual property.
4. Government has less control over the working of such organizations as they generally work with completely possessed backup of an abroad organization.
5. Our interest rates are today, as high as 14 percent to 16 percent. How do we compare with the economies of the country which have an interest rate of 4 percent.

OVERVIEW OF INSURANCE SECTOR POST PRIVATISATION IN 2000

REGULATOR	Insurance Regulatory and Development Authority of India ( IRDAI)
NUMBER OF PLAYERS	General Insurance Companies: 28 Life Insurance Companies: 24
NUMBER OF PRIVATE PLAYERS	General Insurance Companies: 22 Life Insurance Companies: 23
NUMBER OF RE-INSURER	One
FOREIGN INVESTMENT LIMIT	Increased to 49% from 26% (in 2015)
FDI AS OF MARCH 2016	₹8,031 Crores
NUMBER OF LISTED INSURANCE FIRM	None

CONCLUSION

The Insurance division likewise assumes a crucial part in the financial improvement by giving different valuable administrations like preparing reserve funds, intermediating in back, advancing speculation, balancing out monetary markets and overseeing both the social and monetaryhazard.
Understanding the capability of protection segment in activating the investment funds for the profitable utilize and social wellbeing, Government has made different steps to enhance its quality, reach and fame.

With target to give protection cover to all, the Government last year presented Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJBY) to bring more individuals under the insurance cover.
Going ahead, expanding future, good funds and more prominent work in the private division is relied upon to fuel interest for insurance and pension plans. In like manner, solid development in the car industry throughout the following decade would be a key driver for the engine insurance market.

Post capital raising, the insurance segment is required to see more prominent development among main five insurance market on the planet in the following 10 years.

REFERENCES

[1]  http://www.ibef.org/economy/foreign-direct-investment.aspx

[2] http://www.ibef.org/industry/insurance-sector-india.aspx

[3] http://www.india.com/business/6-benefits-of-increased-foreign-direct-investment-limit-in-insurance-sector-101998/