By Richard Rossow —
Status: Not Started — On July 5, 2019, Finance Minister Nirmala Sitharaman announced the government’s intention to further hike the FDI cap from 49 percent.
High Difficulty: Legislation, With Opposition — This reform requires legislative change. Insurance employee unions will strongly oppose. The largest life and general insurers are owned by the Indian government and will oppose. Some Indian conglomerates will likely oppose due to concerns of losing market share.
This is the first installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.
In July 2019, Nirmala Sitharaman pledged to review India’s 49 percent cap on foreign direct investment (FDI) in the insurance sector. The government has not offered a timeline for bringing the relevant amendments to parliament for consideration. Investors hope that the government removes the FDI cap altogether, instead of another piecemeal step of shifting the cap to 74 percent. In addition, foreign investors want to see a new regulation mandating local “management and control” removed.
History of Insurance Liberalization
Until 1999, the government had a monopoly on the provision of insurance services through Life Insurance Corporation and General Insurance Corporation. The Vajpayee government won parliamentary approval for legislation in September 1999 that allowed private firms to enter the market with a maximum of 26 percent FDI. Allowing foreign investment was so contentious that the Vajpayee government had to make a critical concession- putting the FDI cap in the legislation. The FDI cap was augmented to 49 percent in 2014, but a harmful new provision forcing foreign firms to cede management control was approved by the regulator, dampening market interest among new and existing investors.
India’s Insurance Market Today
Today, India’s annual premium for life insurance is around $74 billion and tenth highest in the world. For non-life insurance, it is around $26 billion, fifteenth highest in the world. Premiums have increased since the sector was liberalized. In 2001-02, India’s life insurance premiums totaled $11 billion, and non-life premiums totaled $2.7 billion. Today, there are 24 life insurers and 34 non-life insurance firms in India. Most have foreign joint venture partners.
Over the last two decades, private firms have had a difficult time gaining much ground against the government-owned insurance firms. While private firms clawed a great deal of market share in their initial years of operations, headwinds have been fierce since then, particularly for life insurance. Government-owned firms are given multiple explicit and implicit regulatory benefits that have aided their overall competitiveness, such as a government guarantee backing the projects, and new cost controls for the sector that favor large, established players.
|Market Share of Private Insurers (as %) of Premiums||2001-02||2006-07||2011-12||2016-17|
|Non-Life (Property/ Casualty)||4%||35%||41%||53%|
Why More Reform is Required
Following the increase in the FDI cap to 49 percent in 2015, only half of the 40 insurers with foreign ownership have announced their intention to increase their FDI stake. The shift from 26 percent to 49 percent has not triggered the FDI windfall the government had hoped, due to three main factors:
Lack of majority ownership
Arguments against majority foreign ownership are thin but have proven amazingly sturdy over time. The concern that multinational insurers were key parts of the 2008 financial crisis has been debunked. Foreign insurers have not carried money outside the country in the face of claims.
Local management & control provisions
As part of the 2015 Insurance Act amendments, the government of India added a stipulation that management and control of an Indian joint venture must lie with the Indian partner. Even foreign firms that did not choose to increase their equity stakes were forced to revise their joint venture agreements.
Regulatory “tilt” towards government-owned insurers
India has insurance regulations that directly and indirectly benefit government-owned insurers. The most significant example is the government’s explicit guarantee behind insurance sold by the government-owned carriers.
Five months after the government announced its intention to raise the FDI cap above 49 percent, nothing yet has happened. No draft bill has been floated or introduced to parliament, and the government has been guarded in offering any details or timeline. There are three possible scenarios:
- The government amends the Insurance Act to allow 100 percent FDI.
- The government removes the FDI cap from legislation and decides to set the cap through the issuance of a “Press Note” by the Department for Promotion of Internal Investment and Trade as with virtually every other sector.
- The government amends the Insurance Act to allow 74 percent FDI.
The first and second scenarios would be most appealing to foreign investors — so long as no new “poison pills” like the management & control issue in 2015 — are included.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.