The recommendations of the committee put stress on offering operational autonomy to the insurance service providers and also suggested forming an independent regulatory body.
Irony: It can be seen that, the Malhotra committee neither recommended nor opposed the entry of foreign insurers. The intention behind the words "if and when " was to allow purely Indian companies some time to establish themselves before permitting foreign insurers to enter the market.
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IRDA[/b]
Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority(IRDA) was constituted as an autonomous body to regulate and develop the insurance industry
The IRDA was incorporated as a statutory body in April, 2000.
The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.
Accordingly the Indian insurance industry was thrown open to private and foreign investment in 1999-2000.
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The Act sought to ensure orderly growth of the insurance industry.
The Act of 1999 amended the Insurance Act 1938, the Life Insurance Act 1956 and the General Insurance Act 1972.
According to IRDA, a private sector participant has to fulfill the following criteria for entry into insurance sector.
Minimum paid up capital of Rs. 100 crore
Investment in policy holders funds only in India
Restriction of international companies to minority equity holding of 26%
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The Insurance Amendment Bill[/b]
¢ The Insurance Bill was introduced in the Rajya Sabha in March 2008 under the first UPA government, as part of its financial sector reforms.
¢ The Union Cabinet on September 1, 2008, approved the Bill for Comprehensive amendment of insurance laws which proposes to raise the FDI ceiling in insurance sector from 26% to 49 %.
The Bill also covers the following;
To allow foreign reinsurers like Lloyd’s of London, to open branches in India.
To lower the capital requirement of standalone health insurance companies to Rs. 50 crore from 100 crore.
To allow insurance companies to appoint insurance agents, surveyors and loss assessors
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Changes in FDI Rules[/b]
The Government has decided to review the guidelines for foreign direct investment and has proposed extensive changes in the guidelines. Proposals include;
• Investment by Indian Companies in which foreign firms have beneficial investment will be counted as direct FDI
• Investments by companies that are owned and controlled by foreign entities to be considered in calculating indirect foreign investment.
• Investment by non-resident entities to be counted as FDI.
Interesting Statistics[/b]
A well-developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development at the same time strengthening the risk taking ability of the country.
Nearly 80% of the Indian population is without life, health and non-life insurance
The insurance sector in India is a colossal one and is growing at a rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s Gross domestic product (GDP).
Insurance Industry in India is worth US$ 30 billion, consisted of Life insurance worth US$ 25 billion and non-life insurance worth US$ 5 billion.
India’s insurance industry is expected to reach USD 350-400 Bn. in premium income by 2020 making it among the top 3 life insurance markets and amongst top 15 general insurance markets.
Investment opportunities exist both in Life and non-life segments as strong economic growth with increase in affluence and rising risk awareness leading to rapid growth in insurance sector.
The expected inflow is likely to create 3 lakh jobs in the sector as more companies are planning to use the additional funds mainly to execute their expansion plans
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Effects of Opening of Insurance Sector to Foreign Investors[/b]
· More job opportunities.
· Inflow of foreign capital
· Indigenous reinsurance
· Facilitate technology transfer
· Wide distribution channel
Myths about hike in FDI
Myth 1: FDI hike necessary to improve insurance penetration
Contrary finding: No. Domestic capital markets are sufficient enough
The Govt. claims that to improve insurance penetration in country additional capital of Rs.60,000 Crore is required over 2010-2015 based on IRDA projections.
Since constraints of Indian partners to currently contribute 74% of capital are a hurdle, foreign partners will contribute if cap relaxed.
BUT IRDA Chairman’s deposition to Parliamentary Standing Committee itself states these projections are “not very accurate” and “just an arithmetic”. Public Sector insurance companies are confident of being able to raise money from domestic capital markets as and when required. No need for hiking cap.
Myth 2: FDI hike necessary to improve infrastructure investments
Contrary finding: No. LIC and other public non-life companies contribute more than 70% for those investments
UPA claims investments are required in crucial infrastructure sector and increasing FDI will enable private insurers to hike spend on infra. BUT LIC’s share of investment in infra was 70% and that of public sector general insurers’ was 71% compared to the private sector during 2009-10.
So it is obvious that private insurers with foreign partners are more interested in profits than in investing in building India.
Presence of foreign equity does NOT increase infra investments.
Myth 3: FDI hike needed to improve product offering
Contrary finding: No. Current limit of 26% is enough to bring in new technology and products
For the last part of this article please visit
http://www.managementparadise.com/article/4586/insurance-industry-and-fdi-iii