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100% FDI in Insurance Sector 

Last updated on February 4th, 2025 Posted on February 4, 2025 by NEXT IAS Current Affairs Team  609

Syllabus: GS3/Economy 

In News

  • Finance Minister Nirmala Sitharaman announced the opening up of the insurance sector to 100% foreign direct investment (FDI), up from the previous limit of 74%, to boost the sector.
Global Comparison:
– Countries like Canada, Brazil, Australia, and China allow 100% FDI in insurance, and aligning India with global standards will make it more attractive to foreign insurers.

The Indian insurance sector 

  • It has undergone significant transformation, evolving from being dominated by Life Insurance Corporation (LIC) to a more diverse industry with various players offering a wide range of products.
  • The transformation has been driven by Economic development, Technological advancements, Demographic changes, Increased consumer awareness, particularly after the COVID-19 pandemic, regarding the importance of financial security through insurance.
  • The insurance sector has played a significant role in the economic development of India.
Do you know ?
– In India, the concept of insurance has a long-standing history, with references found in ancient texts such as the Manusmriti, Yagnavalkya’s Dharmashastra, and Kautilya’s Arthashastra. 
– These writings discuss the idea of pooling resources to provide financial support during calamities like fires, floods, epidemics, and famines. 
– Evidence of early insurance practices in ancient India can be seen in the form of marine trade loans and carriers’ contracts, which helped mitigate risks associated with trade and transportation.

Insurance Penetration in India

  • Insurance penetration in India showed a slight decline from 4% in FY23 to 3.7% in FY24, despite a 7.7% growth in total premiums, reaching Rs 11.2 lakh crore.
  • Life insurance penetration decreased from 3% in FY23 to 2.8% in FY24.
  • Non-life insurance penetration remained stable at 1%.
  • Overall insurance penetration in India is 3.7%, which is below the global average of 7%, presenting a significant gap and growth opportunity.
  • Factors for Low Penetration: Limited awareness, economic constraints, and cultural preferences for traditional financial practices contribute to India’s low insurance penetration.
Conditions for 100% FDI In India
– The enhanced FDI limit will apply to companies that invest the entire premium in India. 
– The government also plans to review and simplify current regulations associated with foreign investments
– The Insurance Regulatory and Development Authority of India (IRDAI) will continue to regulate the sector to protect policyholders and ensure compliance with Indian laws, preventing foreign dominance.

Impact of 100% FDI on Insurance:

  • India’s insurance sector has attracted Rs 82,847 crore in FDI since 2000, driving growth and improving operations.
  • The government expects the sector to grow at 7.1% annually over the next five years, driven by foreign investment and policy changes.
  • 100% FDI could address the insurance under-penetration in India, accelerating the adoption of global best practices and introducing innovative products and services.
  • It will ensure long-term capital, enhance technology, strengthen distribution, and increase competitiveness.

Benefits for Customers:

  • Increased foreign investment will introduce more players into the market, intensifying competition.
    • Customers can expect better products, improved service, and competitive pricing, leading to higher insurance penetration and narrowing the protection gap.
  • Greater foreign participation is expected to boost customer service standards and contribute to domestic economic growth by investing premiums in India.

Challenges 

  • Foreign insurers may face challenges navigating India’s complex distribution landscape, as the private life insurance sector is dominated by bank-led distribution, while non-life insurance relies on agency channels.
  • Adaptation Challenges: Foreign insurers will need to adapt their business models to India-specific needs, such as the bancassurance-heavy model in life insurance and agency-led models for health insurance.
    • Many foreign players are already in joint ventures (JVs), so restructuring may take time.

Conclusion and Way Forward 

  • The insurance sector in India has played a vital role towards the steadiness and growth of the Indian economy. 
  • Insurance is a capital-intensive industry, and a move to enhance capital access is beneficial.
    • This could attract global insurers seeking greater control on the Indian operations
  • The opening of the sector to 100% FDI aligns with the goal of “Insurance for All” by 2047, requiring significant capital inflows.
  • The government is also considering revisions to FDI regulations, including changes related to key management and board composition, to create a more favorable environment for foreign investment and sector expansion.
  • The Economic Survey suggests insurers should target tier 2 and 3 cities, as well as rural areas, where awareness and accessibility are low, to increase penetration and stimulate growth.
  • The use of innovative distribution models can help include underinsured customers, particularly those already covered by government schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Fasal Bima Yojana, and Pradhan Mantri Jan Arogya Yojana. 

Source :BS

 
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