EXECUTIVE SUMMARY

India is the third most attractive foreign direct investment destination in the world. The Indian insurance companies offer a comprehensive range of insurance plans. Due to the growing demand for insurance, more and more insurance companies are now emerging in the Indian insurance sector. The present project aims to study the pattern of FDI in Insurance Sector and the regulation in the said sector. The project studies current trend in Insurance sector, the challenges and the prospects ahead .

INTRODUCTION
There is hardly a facet of the Indian psyche that the concept of foreign has not permeated. This term, connoting modernization, international brands and acquisitions by MNCs in popular imagination, has acquired renewed significance after the reforms initiated by the Indian Government in 1991. Generally speaking FDI refers to capital inflows from abroad that invest in the production capacity of the economy and are usually preferred over other forms of external finance because they are non-debt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. India's foreign investment policy is fairly liberal, allowing up to 100% foreign investment in most sectors. However, some sectors have caps on FDI. The government also imposes caps on portfolio investments, within the FDI caps or separately, to cap total foreign equity in certain sectors. These caps apply mainly in areas considered strategic or sensitive, as well as to any investments considered to have nationalsecurity implications. In most sectors, investment up to the caps is permitted on the "automatic route", meaning that companies need only file papers with the central bank after investing. In areas that the government wants to monitor more closely, prior approval is necessary from the Foreign Investment Promotion Board. Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments. FDI inflow helps the developing countries to develop a transparent, broad, and effective policy environment for investment issues as well as, builds human and institutional capacities to execute the same. The insurance sector is of considerable importance to every developing economy; it inculcates the savings habit, which in turn generates long-term investible funds for infrastructure building. The nature of insurance business ensures constant inflow of funds - the payout is staggered and contingency related - thereby making it readily available for investment on infrastructure building. Its contribution to GDP is quite significant. The Union government had opened up the insurance sector for private participation in 1999, also allowing the private companies to have foreign equity up to 26 per cent. Following the opening up of the insurance sector, many private sector companies have entered the insurance business.

HISTORICAL PRESPECTIVE OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. The early references to Insurance in these texts has reference to marine trade loans and carriers' contracts.

MILESTONES IN THE INDIAN INSURANCE SECTOR

The history of the modern Indian insurance sector dates back to 1818, when the Oriental Life Insurance Company was formed in Kolkata. The Triton Insurance Company Ltd formed in 1850 was the first of its kind in the general insurance sector in India. Established in 1907, Indian Mercantile Insurance Limited was the first company to handle all forms of India insurance A new era began in the Indian insurance sector, with the passing of the Life Insurance Act of 1912 The Indian Insurance Companies Act was passed in 1928. This act empowered the government of India to gather necessary information about life insurance and non-life insurance organizations operating in the Indian financial market Due to the increase in allegations of unfair trade practices, the Government of India, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

THE GOVERING LAW

The Insurance Act of 1938 was the first legislation governing all forms of insurance in India The Act of 1938 provided strict state control over the insurance sector. The main defect of the Insurance Act of 1938, was that it did not permit foreign re-insurers to function independently in the country . Foreign insurers were permitted to hold a maximum of 26 per cent stake in a local venture with a minimum paid up capital of Rs 200 crore

REFORMS IN THE INDIAN INSURANCE SECTOR

In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to assess the functionality of the Indian insurance sector and to complement the reforms initiated in the financial sector. The Malhotra Committee attempted to improve various aspects of the insurance sector, making them more appropriate and effective for the Indian market The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. 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.

ROLE OF FDI IN INSURANCE SECTOR

The public sector general insurance companies and the GIC will be permitted to raise capital from the market to meet future capital requirements The Union Cabinet, on Thursday, granted approval for increase of foreign direct investment (FDI) limit in the insurance sector from the present 26 per cent to 49 per cent. Alongside, it also cleared amendments aimed at attracting investments and bringing transparency in the working of the insurance companies. The Cabinet approved amendments to the Insurance Laws (Amendment), Bill, 2008, pending in the Rajya Sabha. These amendments are aimed at removing archaic and redundant provisions in the legislations and incorporating certain provisions to provide the Insurance Regulatory Development Authority (IRDA) with flexibility to discharge its functions effectively and efficiently. The overall objective is to further deepen the reform process which is already underway in the insurance sector, an official statement said here. The approved amendments include that the foreign equity cap is proposed to be kept at 49 per cent as provided in the Insurance Laws (Amendment) Bill, 2008, as against the 26 percent. This is done to meet the growing capital requirement of insurance companies. Foreign re-insurers will be permitted to open branches only for re-insurance business in India and the provisions of Section 27E, which prohibits an insurer to invest directly or indirectly outside India the funds of policy holder, would apply to such branches. To encourage health insurance in India, the capital requirement for a health insurance company is now proposed at Rs.50 crore (instead of Rs.100 crore for general insurance companies) with a view to reducing the entry barrier to a priority sector in the insurance space. The government has also revised the definition of health insurance business to clearly stipulate that health insurance policies would cover sickness benefits on account of domestic as well as international travel. Regarding the obligatory underwriting of third party risk on motor vehicles, a separate Motor Vehicle Insurance and Compensation Legislation is being proposed by the government and the concerns of the Standing Committee regarding the obligatory third-party insurance on motor vehicles will be taken care of, the statement said. The public sector general insurance companies and the GIC will be permitted to raise capital from the market to meet the future capital requirements, provided that the governments shareholding would not be allowed to come below 51 per cent at any point of time. To improve the functioning of surveyors and bring in greater transparency, certain modifications are made to provide for regulations on qualifications regarding appointment of surveyors and to strengthen the Institute of Indian Insurance Surveyors and Loss Assessors (IIISLA). The amendments proposed in the Bill seek to do away with the existing statutory prescriptions pertaining to licensing insurance surveyors and loss assessors etc. and leave these issues to be addressed by way of regulations.

CHANGES IN THE FDI RULES

The Government has decided to review the guidelines for foreign direct investment and has proposed extensive changes in the guidelines. Proposals include: 1. Investment by Indian Companies in which foreign firms have beneficial investment will be counted as direct FDI 2. Investments by companies that are owned and controlled by foreign entities to be considered in calculating indirect foreign investment. 3.Investment by non-resident entities to be counted as FDI

THE INSURANCE AMENDMENT BILL

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; 1. To allow foreign reinsurers like Lloyds of London, to open branches in India. 2. To lower the capital requirement of standalone health insurance companies to Rs. 50 crore from 100 crore. 3. To allow insurance companies to appoint insurance agents, surveyors and loss assessors

MARKET SHARE OF LIFE & GENERAL INSURANCE SECTORS

INTERESTING STATISTICS ABOUT FDI IN THE INSURANCE SECTOR

The Indian insurance market it accounts for only 2.5% of premiums in Asia, it has the potential to become one of the biggest insurance markets in the region India is among the most promising emerging insurance markets in the world India is the third most attractive foreign direct investment destination in the world The present figure of FDI in insurance sector is 26% The proposal to hike that figure to 49% India received approximately US$25 billion worth of FDI in 2007-2008; that number increased to US$27 billion in 2008-2009 While no target has been fixed for the financial year 2009-10, so far FDI inflows for April and May 2009 have surpassed US$4.4 billion A well-developed and evolved insurance sector is a boon for economic development as it provides long-term funds for infrastructure development at the same time strengthening the risk taking ability of the country. Nearly 80% of the Indian population is without life, health and non-life insurance The insurance sector in India is a colossal one and is growing at a rate of 15-20%. Together with banking services, insurance services add about 7% to the countrys Gross domestic product (GDP). Insurance Industry in India is worth US$ 30 billion, consisted of Life insurance worth US$ 25 billion and non-life insurance worth US$ 5 billion. The Indian Insurance market is expected to be around US$ 60 billion by the end of 2011. 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

FDI IN INSURANCE: HOW MUCH TO CAP A CRITICAL APPRAISAL

In India, FDI in insurance sector is allowed up to 26 % at the present. But compared to other sectors like call centers, BPOs, pharmaceuticals, power, hotel and tourism where FDI up to 100% is allowed, this is much lower.

GENERAL OVERVIEW
There are sub-plots within the main story, as the insurance industry considers whether or not the FDI cap in the insurance sector will actually be raised. The common man's picture of the fight for FDI was seen solely as a political one where the Left is acting spoilsport in raising the FDI cap from the current 26 per cent to 49 per cent. The reality, however, is that the industry is as divided as the political parties. Indian corporate chiefs like Deepak Parekh and Rahul Bajaj are keen to dilute their holding in their respective insurance joint ventures. At the same time, they want to maintain their majority stakes. It is the smaller players who are eager for a hike in the FDI cap. The current FDI limit will restrict the growth of private insurance players because a sizeable working capital is required, points out Philip G Scott, group executive director, Aviva Plc. He admits that growth at Aviva could suffer. "We have contingency plans in place but in a worst-case scenario, business will need to grow much more slowly if FDI is not raised," he adds. Aviva is a 26:74 joint venture with the Dabur group. Foreign partners are equally keen to increase their share in insurance joint ventures to make current investments worthwhile. "Raising the FDI cap will give confidence to foreign investors to do business on a scale that is not restrictive," says Sunil Mehta, country head, AIG. His view is shared by a number of global chiefs who have of late visited India and met the regulator. There is some hesitancy among international investors who have a limited appetite to invest in equity capital, bring in the necessary IT and expertise, when they can have only 26 per cent stake. "There are many more choices for us globally to deploy capital where we can best achieve the interest of shareholders," says Aviva's Scott. Another development, which is adding to the discomfort to foreign players, is the acute shortage of domestic partners which can invest 74% of the initial capital of $22.7 million. This shortage of domestic players has increased the valuation of the stakes to be hold by domestic players. The overseas partners are prepared to pay high premium from the day one to the domestic partner and if it is ready to pull out of the existing partner the valuation stake is still higher.

SHOULD THE FDI BE INCREASED TO 49 % ???

The opening up of the cap on FDI investment in India from 26 to 49% has been discussed and re-discussed. The main concerns with this liberalization are political rather than purely economic in nature, although there are distributional impacts to be considered. In my opinion increasing the FDI limit would be an appropriate measure which would be in the interest of the country. We already have a strong regulatory body and there are big Insurance companies already knocking at our doors. Also, LIC is already big enough that it shouldn't be scared of competition. With the kind of brand recognition, penetration and trust that LIC commands in India, it shouldn't really be a big deal. Growing steadily, the insurance sector in India is one of the most talked of sectors amongst the foreign investors. Numerous opportunities are available in this sector for both domestic as well as international players. Traversing a full circle, from a liberal competitive market to nationalization and then back to liberalization, the insurance sector in India has shown rapid expansion over the past few years. Increasing demand of consumer and industrial products and services plus elimination of a few of the trade and investment barriers have been the main drivers behind the exponential growth of the insurance sector in India. By only Increasing the FDI in Insurance, we could even wait out a little longer on the FDI caps in other sectors. By increasing the FDI in Insurance, that would take care of the year's FDI target of the country in one go. But that is not the reason why I say that increasing the FDI in insurance only would affect a lot of other Industries in a positive way, and that we could even do without the FDI in many other sectors for sometime, Real estate for one. FDI in insurance would increase the penetration of Insurance in India, where the penetration of Insurance is abysmally low with insurance premium at about 3% of GDP against about 8% global average. This would be through better marketing effort by MNCs, better product innovation, consumer education and so on. By more investment in the investment sector, India would get adequate supply of long term capitals, which India currently needs very badly. It is to be remembered that people generally invest for long term in insurance policies, say for around 30 years. From the perspective of the domestic private players, FDI is instrumental in filling the savings-investment gap in developing countries, and facilitates mobility of long-term capital flows into the destination economy. Thus, a higher FDI cap would lower the entry-level barriers to insurance as well as allow domestic players to recapitalize their firms. Also, private sector players in the insurance markets are now beginning to look at savings-linked and pure risk policies in order to diversify their markets. These are capital intensive ventures, and most firms are relying on FDI to provide the required capital.

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The impact on the LIC and GIC is again, very controversial. Since 1999, these two companies have seen a turn-around in their levels of product diversification, service packages and customer service. They still retain the largest market share in the sector, and many consumers view this turn-around as positive. Product range and diversity has increased substantially since the opening up of the insurance sector. The advent of competition has ensured that consumer needs are catered to, and now there are specific packages that are tailored to targeted consumer groups. The hiking of the cap will introduce more players into the market and this would increase consumer surplus significantly. FDI has been seen to be beneficial to the recipient nation because of the positive technology spillovers generated. This is particularly applicable in the Indian context as since the industry has been opened up, the perception of insurance has changed from just a practice of "risk reduction" to a method of short term profit-oriented investment. There are huge varieties of both life and non-life insurance policies and packages, and measures like banccassurance, unit linked insurance, savings linked insurance and the like are being introduced to great success. The entry of a large number of Indian and Foreign private companies in life insurance business has to lead greater choice in terms of products and services. In the years since the IRDA Act initiated market reforms, the insurance sector has experienced some remarkable changes. The premium underwritten in India and abroad by life insurers in 2006-07 has grown by 47.38 per cent as against 27.78 per cent in 2005-06. First year premium including single premium accounted for 48.45 per cent of the total life premium,whereas renewal premium accounted for the remaining. First year premium including single premium recorded a growth of 94.96 per cent in 2006-07 compared to 47.94 per cent in 2005-06, driven by a significant jump in the unitlinked business. The private life insurers have increased their market share from 14.25 per cent in 2005-06 to 18.08 per cent in 2006-07. This has not affected the growth of LIC, as the premium collected by LIC in 2006-07 has increased by 40.79 per cent over the premium collected in 200506. In the case of general insurers the growth was 21.51 per cent as against 15.62 per cent in the previous year. In 2006-07, the four public sector general insurers had reported a growth of 8.18 per cent (6.87 per cent in the previous year) in underwriting of premium within and outside India whereas eight private sector insurers reported a growth of 61.24 per cent. The market share of private insurers had increased to 34.72 per cent compared to 26.34 per cent in 2005-06 implying a decline in the market share of the public sector insurers. The number of policies underwritten by the private insurers increased by 51.48 per cent whereas it declined by 2.25 per cent for public insurers.29 The position has now gradually changed after the opening of the insurance sector markets, where in the first 2 years most of the private companies suffered losses and had a very small share of the insurance market. Now slowly the private companies by offering better products in a competitive environment have established their market share and even though LIC still is the market leader, but its share is gradually decreasing and private insurers are gaining the confidence of the consumers. In the light of these facts, I feel that it is now high time that cap on FDI in the insurance sector should be increased to 49%.

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PROBLEMS OF INCREASING THE CAP TO 49 %

At the moment, Indian promoters are apprehensive that should FDI be raised, foreign partners will have an upper hand in the 10th year of operation. Their concern follows the Insurance Act dictating the dilution of Indian promoters' stake in favor of the general public. This means that while Indian promoters would end up holding 26 per cent according to the IRDA Act, their foreign counterpart could have a higher stake of 49 per cent. Describing all the impacts of a potential lifting of the cap is rather tricky, as the main problem with this policy decision is that it is difficult to separate the costs and benefits of FDI versus those of increased FDI.23 There is a "tipping-point" where the domestic industry loses economic control of the sector and that is where the cap should be placed. The Indian government has estimated this point to be 51%, thus placing the cap at 49%. C S Rao, chairman of Insurance Regulatory and Development Authority, says in response to industry's apprehensions that the clause would necessarily be amended, "else both the shareholders will need to bring down their respective holding to 26 per cent." The IRDA Act had not visualized foreign holding rising from the current 26 per cent to 49 per cent. At the same time, India Inc hopes to make a killing when it sells its stakes to foreign partners. "Dilution of shareholding will be at a premium. I cannot see Indian promoters diluting at par after having put in the majority of funds in the beginning when the venture was taking off," says Shikha Sharma, managing director, ICICI Prudential Life Insurance Company. Foreign partners have already indicated their keenness to raise their stakes, even if it is at a premium. Prudential Plc, the foreign joint venture partner of ICICI, has beefed up plans to hike its stake in ICICI Prudential Life Insurance Company.

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ISSUE OF PENETRATION OF INSURANCE MARKETS TO ALL REGIONS

The insurers of India address issues of poor insurance penetration, low insurance density with hardly any insurance protection against natural calamities like droughts, floods, hurricanes and earthquakes. The insurance market is developing in the region only now and it has to be nurtured carefully. The nationalized companies did contribute to the spread of insurance beyond the metropolitan areas

PROBLEMS OF INVESTMENT OF THE FUNDS COLLECTED BY THE INSURNACE COMPANIES

The insurance sector has been an important source of low cost funds of long-term maturities all over the world. In the Indian context, however, the insurance companies, particularly in life insurance, apart from covering risk are also committed to repayment of the principal with interest although with long maturities and thereby tend to act as investment funds. One of the reasons that this has happened is that the average premium charged by the insurance companies in India tends to be relatively high due to obsolete and rigid actuarial practices and inefficient operations. There is pressing need to reorient the insurance sector in a manner that it fulfills its principal mandate of providing risk cover. The opening up of the insurance sector to private participation, including banks in August 2000 has been able to instill an element of competition which in turn is promoting efficiency and professionalism and enhancing consumer choice through product innovation. 28 In my opinion India is hungry for Long term capital needs to fund the building of infrastructures, which is the need of the hour. Infrastructure or the lack of it has been the brake, which have hindered the leap of the Indian Economy. Despite shortcomings, Indian Economy has come a long way, but every industry leader would crib at the infrastructure bottlenecks that they have face everyday in their effort for growth.

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IMPACT OF FDI IN THE INSURANCE SECTOR

The governments unveiling last week of a revival package for the insurance followed by a hike in FDI limit for the sector has no doubt injected hope into an ailing industry, which has the potential to contribute much more to the economy and benefit a larger chunk of the population. But everything hinges on the implementation. The reforms in the fund-starved insurance and pension sectors are important for channelising long-term public savings to the infrastructure sector, for which the government envisages investments of $1 trillion in the next five years. The capital infusion in insurance is also needed for the much required growth of the sector and enlarging its base. India currently does not have enough capital to boost this sector. The current reform, if implemented, can bring in close to Rs 30,000 crore required for the expansion of the insurance sector in the country in the next five years. Besides, insurance penetration in India is still in its nascence. Twelve years after it was opened up for private competition, just a tad over 4 per cent of the population invests in insurance products. Analysts feel that unless insurance penetration is raised in the country, growth in the sector will be subdued. Economists also opine that the contributions of the insurance and pension sectors can enhance overall economic growth on a sustained basis. Indias economic growth has fallen to a nine-year low of 5.5 per cent of late. According to insurance regulator IRDA, the sector presently constitutes around 4.5 per cent of the GDP. Throwing it open to foreign participation can help the sector grow at a peg of 11-12 per cent per annum. For that big a growth in this sector, it is important to channelise household savings into insurance, said Mahesh C Purohit, eminent economist and director, Foundation for Public Economics and Policy Research. Currently, a chunk of household savings in India is diverted into physical assets such as gold and land instead of financial products. Purohit said that the recent move by the government to relax investment norms in insurance and handing out tax breaks, especially for life insurance products, is sure to usher in a new and vibrant era for insurance.

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However, others were sceptical on the implementation of 49 per cent FDI in insurance. An official with a leading private insurance house said that while the FDI insurance proposal looks attractive, a lot depends on how it will be implemented. In taking the unusually bold measure, the UPA has sought to go against the recommendations of a parliamentary standing committee headed by the Opposition BJP. The BJP has supported FDI in the insurance sector to the extent of 26 per cent for foreign players. Now, the Bill needs to be passed by Parliament since it is an act of law and the government does not have the requisite number in the Upper House. To compound the problem, the two major allies, DMK and Samajwadi party have signalled their reservations on the issue. This makes it difficult for the government to give final shape to the proposal. The government has said that it will try to bring on board a section of allies and Opposition parties who are averse to the move. There are also indications that the government will delay the Winter session of Parliament to buy more time to convince the parties opposing the move. But, there is the impending fear that the forthcoming session might get buried in the din and bustle of Opposition protests -- as witnessed in the wake of the 2G and coal block allocation controversies -- without yielding much by way of results

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BENEFITS EXPECTED IN THE LONG RUN

The benefits of increased FDI limit will be seen more in the long term: Arun Balakrishnan Interview with Chief Executive Officer, BerkshireInsurance.com BerkshireInsurance.com, a non-direct subsidiary of billionaire Warren Buffetts Berkshire Hathaway, currently sells non-life insurance products to retail consumers in India through its website. In an interview with Somasroy Chakraborty, Arun Balakrishnan, chief executive officer of BerkshireInsurance.com, says the company plans to enter the life insurance space soon. 1. How will the increase in foreign direct investment ( FDI) cap benefit the sector? The Cabinet approval of 49 per cent foreign direct investment in insurance is definitely a very positive sign, though we still need to wait and see whether it gets cleared by Parliament. Nonetheless, it indicates the government recognises the capital requirements of the insurance industry and is taking steps towards bridging the capital gaps. The benefits of the increased FDI would be seen more in the long term than in the short term. Most prominent insurance companies have a presence in India and will be able to augment their shareholding. This is also a window for Indian promoters to exit the insurance business if they feel it is not a part of their core growth strategy. Broadly, this would tend to create an environment, which consists of shareholders who are willing to invest and to stay committed to the Indian insurance growth story.

2. What are your growth plans? Entering the insurance segment is a long-term commitment. The aim has been to build a sustainable model and offer great value to customers, while ensuring a robust structure to handle any claims, queries or concerns. Our immediate goal is to get as many products as possible online, so that these can be purchased instantly.

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3. When do you plan to enter the life insurance space? We already have a licence for life insurance with our current partners, Bajaj Allianz, and we are looking to actively enter this space.We are internally gearing up in terms of product positioning, operational requirements, training and marketing to enable us to launch our online life insurance business. We have spent the past year carefully understanding the online insurance sector and we believe this would give us a definite edge in servicing this segment. You should be seeing us joining the life insurance side soon.

4. One of your focus areas is travel insurance. Is it gaining popularity among Indian travellers? Awareness among Indian customers is increasing day by day. Travel insurance offers cover for a host of travel-related perils, as well as health and medical requirements, that might arise during your travel. With the average Indian now travelling internationally more often than five years before, we clearly believe this is a segment that will pick up.

5. What are your views on the draft on a standard insurance product for rural and social sectors? This is a good move to attempt greater reach and affordability of insurance for lowincome groups.In India, even today, the insurance penetration is only around six per cent of the total population, with 4.40 per cent in life and just 0.71 per cent in general insurance.The Insurance Regulatory and Development Authoritys proposed draft on standard insurance products looks to deepen the market and enable inclusion. However, further clarity is needed on the guidelines for implementation.The main challenge will be developing and sustaining a viable distribution network. In underpenetrated areas, distribution and premium collections costs would escalate, making it difficult to offer the products at a nominal cost. One way this issue could be tackled is by building a robust online distribution and payment infrastructure, specialised to meet the needs of the rural population, along the lines of what e-choupal has successfully implemented.

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MYTHS ABOUT HIKE IN FDI IN INSURANCE FROM 26% TO 49%

MYTH 1: FDI CAP HIKE NECESSARY TO IMPROVE INSURANCE PENETRATION NO! DOMESTIC CAPITAL MARKETS ARE ENOUGH. UPA claims that to improve insurance penetration in country additional capital of Rs.60,000 crores 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 Chairmans 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 CAP HIKE NECESSARY TO INCREASE INFRA INVESTMENTS NO! LIC & PUBLIC SECTOR NON-LIFE COMPANIES CONTRIBUTE OVER 70% OF INFRASTRUCTURE INVESTMENTS UPA claims investments are required in crucial infrastructure sector and increasing FDI will enable private insurers to hike spend on infra BUT LICs share of investment in infra was 70% and that of public sector general insurers was 71% compared to the private sector during 200910 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 CAP HIKE NEEDED TO IMPROVE PRODUCT OFFERING NO! CURRENT 26% LIMIT ENOUGH TO BRING IN NEW TECHNOLOGY AND PRODUCTS Product portfolios of the public sector insurers are comparable to those of private sector. Most new products introduced by foreign insurers are investment-oriented in nature with HIGH RISKS attached and are totally inappropriate in providing social security to the Indian people, especially for the poor and aam aadmi. These reasons were used by government to bring in 26% foreign equity and assurances were given that the cap would not be increased- it is absurd that the very same reasons are now being given to justify increase in FDI limit!

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SWOT ANALYSIS OF FDI IN THE INSURANCE SECTOR

The present increase in FDI would benefit Indian economy There are vast opportunities in Indian market both for domestic and foreign players The insurance sector in India is slated to grow to beyond Seventy Billion Dollars by the fiscal year 2011 Despite the formidable success achieved by LIC, the government has noted that only by bringing in more FDI can they create an environment for Investment in insurance by the average middle class Indian and otherwise STRENGHTS 1. A range of new products had been launched to cater to different segments of the market, while traditional agents were supplemented by other channels including the Internet and bank branches 2. These developments were instrumental in propelling business growth, in real terms, of 19% in life premiums and 11.1% in non-life premiums between 1999 and 2003. 3. India has a large population with an increase in its per capita income 4. Indias middle income is rapidly increasing emerging as a profitable market

WEAKNESSES 1. India is among the lowest-spending nations in Asia in respect of purchasing insurance (China, which spent USD 36.3 per capita on insurance products & Indian spent USD 16.4) 2. Even after the liberalization of the insurance sector, the public sector Insurance companies have continued to dominate the insurance market 3. In the long run, other forms of non-price competition like aggressive advertisement wars are likelyTo lead to increasing costs, eventually harming the interests of the consumers 4. A key challenge for Indias non-life insurance sector will be to reform the existing tariff structure. From a pricing perspective, the Indian non-life segment is still heavily regulated 5. Reinsurance is only provided by GIC 6. While the insurance business is highly concentrated in India, the share of foreign companies is low

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OPPORTUNITIES 1. Indias improving economic fundamentals will support faster growth in per capita income in the coming years, which will translate into stronger demand for insurance products 2. Strong growth can be sustained for 3040 years before the market reaches saturation 3. there is plenty of room for growth in personal accident, health and other liability classes 4. Rising household income and risk awareness will be the key catalysts to spurring more demand for these lines of business in the future 5. Health insurance could potentially have an important role in driving insurance market development forward 6. the largely underserved rural sector holds great promise for both life and non-life insurers

THREATS

1. Between 1985 and 2003, economic losses in India due to natural catastrophes averaged around USD 1.2 billion or 0.4% of GDP every year 2. Floods were the main peril, accounting for 40% ofcumulative losses over the period, followed by storms (35%) and earthquakes (20%)

3. CUMALATIVE CATASTROPHIC LOSES 1985-2000

flood earthqu ake storms drought

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4. strong growth prospects pose pressure on the industry, and the economy at large, to better manage the exposure to natural perils 5. Questionable Reputation of the Foreign Partners

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EXPERTS TALK!!!!!! FDI in insurance to drive dynamism to industry: Experts

In reaction to the cabinets approval to hike foreign investment ceiling in the insurance sector to 49% from the present 26%, Vibha Padalkar, ED & CFO, HDFC Life and Gautam Mehra, ED, PwC discuss how this will help alleviate the stress in the sector. .Padalkar welcomes the move and adds that this will help bring in a lot of dynamism to the industry wherein the industry, ultimately, stands on its own feet. Both Padalkar and Mehra are of the view that the requirement of capital in the industry is very high. We must remember that this is a very capital intensive industry. Already about Rs 33,000 crore has been invested as capital and a further Rs 50,000-60,000 crore is required before companies actually breakeven and start making profits, said Padalkar. Answering the question on how soon how soon foreign participation may come into the Indian insurance sector, Mehra said it would depend on the requirement for capital or the urgency for requirement of capital at each company level. It will drive how quickly that company goes back to its shareholders for further capital or goes to the public market for further capital.

Below is the verbatim transcript of the interview

Q: How important is this hiking of the FDI limit in the insurance sector? Structurally, how will this help alleviate the stress that the sector has seen for so many years? Padalkar: This is something that has been promised to the industry right from the beginning. It is, to some extent, living up to these promises. Also, we must remember that this is a very capital intensive industry. Already about Rs 33,000 crore has been invested as capital and a further Rs 50,000-60,000 crore is required before companies actually breakeven and start making profits. Where will all this capital come from? That question could very well be answered now once this is passed by the parliament wherein companies can tap capital both from local shareholders as well as overseas investors. This will also help bring in a lot of dynamism to the industry wherein the industry, ultimately, stands on its own feet. It is a fairly open market kind of an economy for the industry.

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Q: Do you think enough rules are in place in India to ensure that the industry is secure? There are legitimate concerns both in political and in civil quarters that after especially events like AIG, would it happen that some foreign insurer is in trouble in its place of origin, and therefore, decides to quit the Indian market? Would there be, therefore, possible distress? Are enough rules in place in terms of ring fencing the capital that comes, sinking fund etc.?

Mehra: It is important to note that we have had foreign investment in this sector up to 26 per cent for the past few years. You mentioned about AIG, but look at how the industry or the regulator has got over that; it has not really impacted the business of that entity here. With that experience in hand and given the concerns of the industry around capital raising, as Vibha correctly pointed out, the requirement of capital far exceeds the potential risk. We have already had an experience of having foreign investment in this sector for the past few years without any mishaps. Lets not forget, we have a regulator in place which will oversee the business closely, whether it is about the governance framework, the risk framework, the policies, the kind of products you can sell, how you can manage the money - all of that is being clearly regulated on an ongoing basis.

Q: How does this change the situation on the ground for you in terms of listing? If this indeed were to come, would you see some companies getting listed in a couple of months or maybe in the year?

Padalkar: Definitely. The timeframe really depends on what is right for each company. But I would imagine that at least one of the questions that every company would have had that is, when will FDI or FII relaxation happen? Hopefully, that question would be out of the way. What remains is the fundamentals of each company and that would differ widely. Once both the micro and the macro elements for a particular company are right, and targets are met, there is nothing stopping the company from going in for an IPO.

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Q: Realistically, how soon do you see foreign participation come into the Indian insurance sector? Do you think deals could get consummated within this fiscal itself or do you think it will take more time?

Mehra: I think we have to segregate that into two parts. One is obviously depending on the requirement for capital or the urgency for requirement of capital at each company level. It will drive how quickly that company goes back to its shareholders for further capital or goes to the public market for further capital. I think one important point to note here is that these talks or proposal is to increase the foreign investment in insurance companies from 26-49 per cent. The company would have an option either to raise additional funds from its existing shareholders to raise the percentage of that shareholder from 26-49 per cent or to go and attract foreign investment through the FII route coming in for a listing. Secondly, if you look at new players coming in, honestly I dont see action immediately on the ground, because such things take time.

Q: Would you estimate how much money might come in two years? Mehra: Difficult to hazard a guess on that. It is also driven by the other macro environment in the country. Foreign players, of course, are interested in this business but they will also be looking at the other macro factors.

Q: Would HDFC want to monetize its investments? Mr. Mistry spoke to us about fair value. Where would you place fair value? Padalkar: It is difficult to say because no private insurance company is now listed in India. But if you look at the two recent deals, the Max deal as well as the Reliance deal, they have enjoyed pretty rich valuations. The deals have happened about 3x of embedded value, which is really the discounted cash flows of all our future earnings. If you go by that whether we will get those kind of valuations or more because of the brand that HDFC enjoys, is something that is hard to really have a view on, at this point in time. But we are hopeful that given these two recent deals, it should be a pretty attractive proposition in terms of valuation for the company.

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Q: There are some analysts on the street who believe that if HDFC reduces its stake from 72 per cent to 51 per cent, it may lead to capital gains of around Rs 2,200 crore plus. Is that a realistic assumption or do you think you cannot make any kind of assumptions at this point in time? Padalkar: Yes, it really depends on what would be the agreement between the promoters. Keki Mistry mentioned just recently that Standard Life have an option to take up their shareholding as and when FDI relaxation happens. Whether they will take it up to the full 49 per cent or leave some headroom for FIIs, any number of permutations is possible. It is little bit premature to contemplate what would be the final arrangement between the promoters. Any one of these outcomes is possible.

Q: You would agree that things would happen at 3x or that was one-off because somebody wanted a strategic voice in that business? Mehra: As Vibha mentioned, there had been two transactions which have happened around that value and that seems to be more than a coincidence. So maybe, that may set some benchmarks for valuations.

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RECOMMENDATIONS
To begin with, India needs to further liberalize investment regulations on insurers to strike a proper balance between insurance solvency and investment flexibility Furthermore, both the life and non-life insurance sectors would benefit from less invasive regulations In addition, price structures need to reflect product risk. Obsolete regulations on insurance prices will have to be replaced by risk-differentiated pricing structures There is huge untapped potential, for example, in the largely undeveloped private pension market. At the moment, less than 11% of the working population in India is eligible for participation in any formal old-age retirement scheme. Private insurers will have a key role to play in serving the large number of informal sector workers. Price liberalization will be needed to improve underwriting efficiency and risk management International reinsurance

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CONCLUSION
Having analyzed in brief the history of insurance sector and the performance of the private insurance companies, it becomes pretty evident that the Government is acting as a roadblock to the economic development of the country by not increasing the cap on FDI in the insurance sector to 49%. While it is recognized that the macroeconomic backdrop remains favourable to growth, there still remain a few hurdles that we have to cross. The need for a higher level of foreign equity participation is recognised and the government has announced its intention to raise the FDI cap to 49 percent from the present level of 26 percent. There has to be a greater flexibility given to the insurers in taking investment decisions and this issue is proposed to be addressed when comprehensive amendments are taken up to revamp the antiquated Insurance Act of 1938. This exercise of amending the legal framework is already on the anvil. The general insurance business is predominantly a tariff controlled market. There is a demand for abolition of tariffs on the ground that such a step would promote efficiency and better service to the public at a lower cost. While the Authority is in broad agreement with this proposition it would like to exercise caution to ensure that there is no large scale destabilisation of the market in its transition from a tariff to a non-tariff regime. The Authority has prepared a schedule for moving to a detariffed regime. The schedule envisages distinct actions to be taken by the insurers with specific cut off dates for each action so that Authority could review the action taken by insurers before moving from tariff to a de-tariffed scenario. In the area of reinsurance, the Authority is conscious of developing local market capacity to withstand the adverse impact of catastrophic perils and would welcome the idea of having more than one reinsurer. At the present time, none of the insurance companies are publicly listed and this calls for further strengthening of corporate governance in terms of reporting and disclosure practices in a consistent and transparent manner. Also proper guidelines need to be brought out to sanction the role of SEBI when insurance companies list in the stock markets so as to avoid any direct conflicts of SEBI and IRDA, which though by the present provisions of IRDA does not seem to be happening because SEBI would only have control in the listing in the stock markets. Insurance today has moved to the center stage of World economy. The growth of insurance worldwide and its influence on the government action provides a clear indication of the relevance and importance of this sector in the Indian economy. With the opening up of the insurance sector, policyholders and investors will be exposed to a wide range of products. However, in India, insurance is far from being considered with due importance. Actually, in India, nobody takes up insurance unless and until he has had a bad experience. In a liberalized market, the country can gather enormous investment for infrastructure growth. Competition can bring in a healthy insurance industry. The only deterrent in India is that it has only a single digit billion foreign investment and lags behind other developing countries.
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 On the regulatory side, there are outstanding issues concerning solvency regulations, further liberalizing of investment rules, caps on foreign equity shareholdings5 as well as the enforcement of price tariffs in the non-life insurance sector The proliferation of bancassurance is rapidly changing the way insurance products are distributed in India. This will also have strong implications on the process of financial convergence and capital market development in India Health insurance is still underdeveloped in India but offers huge potential, as there will be increasing needs to purchase private health cover to supplement public programmes Likewise, the deficiencies in current pension schemes should offer significant opportunities to private providers With the majority of the population still residing in rural areas, the development of rural insurance will be critical in driving overall insurance market development over the longer term

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BIBLIOGRAPHY
1. 2. 3. 4. www.indiainsurancereserach.com www.economictimes.indiatimes.com Principles of Insurance Law Insurance Regulatory & Development Authority ( www.irdaindia.org )

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