By Richard M. Rossow —
- Status: In Progress– Amended in 2015 to allow 49 percent FDI; still below majority, and foreign firms lost ability to have management
- Difficulty: High– Requires legislative amendment. Strong opposition from government-owned insurers, insurance unions, some Indian domestic insurance promoters, and some political parties such as the Communist Party of India.
This is the first installment in a series of articles on the Modi Reforms Scorecard by the staff and experts at the Wadhwani Chair in U.S.-India Policy. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and what impact such reforms could have on specific sectors or the economy at large.
In his first budget speech after taking office as finance minister in 2014, Arun Jaitley pledged to take a long-awaited reform across the finish line- increasing the foreign direct investment (FDI) limit in insurance from 26 percent to 49 percent. Less than a year later, India’s Parliament approved these amendments to the Insurance Act. But this reform was not sufficiently grand to have deserved its applause, and new provisions shifting control of joint ventures to local partners have undercut its significance. The government must regroup and begin proceeding on new amendments that allow majority foreign control of an insurance venture to unlock the potential of this critical sector.
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.
Within a few years, consumers had a dazzling new array of insurance product choices. Advertising made consumers more aware of the benefits of insurance, and the government-owned insurers continued to thrive, even after losing their monopolies.
After Congress won the 2004 election, India’s new finance minister P. Chidambaram announced that liberalizing the FDI cap in insurance from 26 percent to 49 percent would be among the United Progress Alliance government’s 3 priority sectors (along with telecommunications and civil aviation) for FDI cap changes. However, the government was not able to get the related amendments approved by Parliament by the end of its 10-year run, in large measure due to opposition from the Bharatiya Janata Party. This critical reform remained stalled.
India’s Insurance Market Today
Today, India’s annual premium for life insurance is around $73.2 billion, 10th-highest in the world. For non-life insurance it is around $24.8 billion, 15th-highest in the world. Premiums have increased dramatically 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 32 non-life firms operating in the market. Most have foreign joint venture partners.
But 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, as indicated in the chart below, headwinds have been fierce since, 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.
As a result, India remains under-insured, with only around $73 per capita per year in insurance premiums, the 73rd-highest total in the world- less than one-tenth the rate in South Africa.
|Market Share of Private Insurance (by percentage) of Premium by Private Insurers
|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 21 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:
- Regulatory “tilt” towards government-owned insurers;
- New rules on local “management & control” adopted after the Insurance Act amendment was passed in 2015, forcing foreign firms to hand management control over to their local partners;
- 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.
There will likely be only a single full Parliament session before the 2019 national election. The timing for introducing another amendment to the Insurance Act will likely fall to the next Indian government. Whoever leads the next government should prioritize another step in liberalizing the insurance market. Facilitating an increase in the FDI cap to allow majority foreign ownership while avoiding any related “poison pills” like the “local management & control” rule should provide a boost to foreign investment flows, increase valuations of existing insurers, and increase employment for staff and agents.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at CSIS.