49% FDI in Insurance Industry: Prospects and challenges

The Indian insurance sector was opened up for investment by the private sector through the IRDA Act of 1999. This bill permitted FDI in insurance companies up to a maximum of 26%. Since 2000, 52 insurance companies have been setup, which have infused more than 30,000 crore rupees to boost business.



Fig: Life Insurance Penetration and Density Levels for various economies (KPMG)

Post opening up the insurance sector, the industry has seen two broad phases – a high growth phase from 2001-2010 and a dormant phase from 2010-2013. Penetration (ratio of premiums to GDP) of life insurance fell from 4.4 percent in 2010-11 to 3.17 percent of GDP in the last three years. Penetration in the non-life sector too remains below 1 percent of GDP. India has an insurance density (ratio of premiums to total population) of $43 and $11 respectively for life and non-life insurance, one of the lowest among developing and developed countries

The insurance sector has huge growth potential. The market is expected to touch $ 350-400 billion by 2020, up from $65 billion. Despite having one of the largest markets with respect to the amount of money involved, India’s 120 crore population has one of the lowest insurance coverages across the globe. 4.4 percent Indians have a life insurance and 6 percent have any form of health insurance.

The life insurance sector forms a major share of the insurance sector. Life insurance has an 80.2 percent share of the insurance industry, leaving the non-life sector trailing at 19.8 percent. The low share of general insurance in terms of penetration resulted in Indian general insurance companies having one of the highest combined ratios of 1.23 across the globe (Combined ratio is the ratio of payouts to the earnings from premiums)


Fig: General Insurance Penetration and Density Levels for various economies(KPMG)

The proposal to raise the FDI cap to 49% will bring in much needed low-cost capital. Insurance is a capital-intensive business and has long gestation periods. While India is recognized as one of the fastest growing insurance markets, with a potential to achieve 15- 17% CAGR over the next 7-8 years, the industry is plagued by low growth, rising labour costs and lack of government reforms. Foreign capital is required to fund the next stage of expansion and help meet the specific growth opportunities in the industry, especially in unbanked areas.

Benefit to the investor

Post the turn of the century, India clocked growth rates of more than 7% for the first decade. The global crisis caught on with the Indian firms and led to sub 5% growth rates in 2010- 2013.

However, the long-term growth story of India is still intact. A ballooning urban middle class characterized by higher disposable incomes and domestic consumption, coupled with an increased awareness of insurance products is a very attractive proposition for the foreign investors.

Life Insurance Corporation of India, a public sector player, forms a major share of the Indian Insurance market. This provides an opportunity for swift moving growth-oriented private players to come up with innovations to target specific growth opportunities.

The government is aggressively promoting health insurance for all citizens. According to market analysts, health insurance grew at a rate of over 30 percent from 2006 onwards. Domestic general and health insurance companies presently do not have the capital to either penetrate the existing market effectively or to expand the market. A largely unpenetrated market provides significant growth potential for foreign players.


(Total premium: $11.5 billion) (Total premium: $32 billion)-16%CAGR

Source: KPMG

Benefit to the industry and the consumer

A mature insurance segment helps in the creation of long-term funds required for implementing capital-intensive infrastructural and defense investments. Raising the FDI limit will attract investments of $ 2 billion immediately and about $ 10 billion USD in the long term. The increase in non-debt FDI inflows helps in bridging the current account deficit, thereby keeping the exchange rate stable. It will help the cash-starved loss-making insurance companies to strengthen their operations and put in place an efficient and innovative system to tap a vast majority of the 75-crore insurable population by 2020. Expansion plans of insurance companies into hitherto untapped markets will result in large-scale job creation.

Enhanced foreign participation will see the industry become highly competitive and thereby move towards global standards regarding product options and service levels. Insurance companies can benefit greatly by leveraging on the partner’s technology to improve the efficiency of their distribution system. This will reduce the cost of insurance for the end consumer, besides giving him a variety of options.

Challenges of FDI in Insurance

In spite of making it mandatory that management control remains in Indian hands and making the approval of the Parliament and the Foreign Investment Promotion Board(FIPB) compulsory before every investment, the Opposition parties made every attempt to stall the progress of the bill. Their argument is that increased FDI in a sensitive sector like insurance, which provides funds for long-term capital projects, will act as a threat to the stability of the financial markets since the profit earned in the country can be repatriated abroad.

Another argument is that in the case of multiple Indian partners together holding 51%, a foreign player can end up as the largest shareholder in the company. This may result in the management acting in the interest of the foreign shareholders, which may not align with the interests of the domestic consumers at all times.

The insurance sector is currently tightly regulated and monitored by the government. To invite FDI, some of these regulations may have to be relaxed, leading to a compromise of the interests of the public.

Critics point out that the increased inflow in the market may not end up being used to increase the competition or improve services. Since many insurance companies are in the red, the inflow of money may provide a lucrative exit option to the Indian partners and lead to a consolidation of the existing players, without much money inflow into the companies.

The increase in FDI for insurance will act as a catalyst for the insurance industry. If implemented in the right spirit, this move may serve as a model for opening other sectors of the economy to FDI.




  1. Evans, , Sharma, S., & Doshi, S. (2014, August 1). Higher FDI in Indian Insurance sector – a buzz for the industry. Retrieved January 10, 2015, from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/fdi- cap-increase-for-indian-insurers-v2.pdf
  1. Singh, , & Gautam, A. (2014). Foreign Direct Investment and Indian Insurance Industry. International Journal of Advance Research in Computer Science and Management Studies, 2(6), 158-163.Retrieved January 8, 2015, from http://www.ijarcsms.com/docs/paper/volume2/issue6/V2I6-0061.pdf
  1. Insurance Sector in (2014, November 1). Retrieved January 10, 2015, from http://www.ibef.org/industry/insurance-sector-india.aspx
  1. Kumar, (2014, July 24). 6 benefits of increased Foreign Direct Investment limit in insurance sector. Retrieved January 10, 2015, from http://www.india.com/business/6-benefits-of- increased-foreign-direct-investment-limit-in-insurance-sector-101998/
  1. Everything you need to know about the Insurance Bill | Latest News & Updates at Daily News & (2014, July 31). Retrieved January 10, 2015, from http://www.dnaindia.com/money/report-everything-you-need-to-know-about-the- insurance-bill-2006816
  1. FDI hike gives boost to investment starved insurance sector! (2014, July 24). Retrieved January 10, 2015, from http://zeenews.india.com/exclusive/fdi-hike-gives-boost-to- investment-starved-insurance-sector_7118.html


Anirudh Batra is a second-year student at IIM Ahmedabad and a member of the Placement Committee. He did his summer internship at Monitor Deloitte and is an Electronics Engineer from BITS Pilani.