1INTRODUCTION 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. India is fast emerging on the world map as a strong economy and a global power. With a huge population and large untapped market, life and non life insurance happens to be a big opportunity in India. Soon after the liberalization, there was a remarkable improvement in the Indian insurance industry. After 1991, the Indian insurance industry has geared up in all respects, as well as it being forced to face a lot of healthy competition from many national as well as international private insurance players. The insurance sector in India used to be dominated by the state-owned Life Insurance Corporation and the General Insurance Corporation and its foursubsidiaries. But in 1999, the Insurance Regulatory and Development Authority (IRDA) Bill opened it up to private and foreign players, whose share in the insurance market has been rising. As a part of overall financial sector reforms, the Government set up the Committee for Reforms in the Insurance Sector in 1992. In its report released in early 1994, it recommended the opening up of the sector to private sectorparticipati on. This was done in 2000. Since then there has been rapid growth and share of insurance in total financial savings of the economy has improved significantly. The number of life insurance companies has increased from 13 at end March, 2003 to 18 at end March, 2008. Competition in the industry is increasing with new players trying to establish a significant presence. Currently the total insurance market in India is about US$ 30 billion, in which the element of FDI is US$ 0.5 billion. This is 1.6% of total insurance business in India. Foreign direct investment (FDIs) will increase in insurance sector by US$ 0.46 billion in next 2 years and likely to touch US $ 0.96 billion as it is still regulated.
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The insurance sector is of considerable importance to every developing
economy; it inculcates the savings habit, which in turn generates long-terminvestible funds for infrastructure building. India is fast emerging on the world
map as a strong economy and a global power. With a huge population and large
untapped market, life and non life insurance happens to be a big opportunity in
India. Soon after the liberalization, there was a remarkable improvement in the
Indian insurance industry. After 1991, the Indian insurance industry has geared
up in all respects, as well as it being forced to face a lot of healthy competition
from many national as well as international private insurance players.
The insurance sector in India used to be dominated by the state-owned Life
Insurance Corporation and the General Insurance Corporation and its four
subsidiaries. But in 1999, the Insurance Regulatory and Development Authority
(IRDA) Bill opened it up to private and foreign players, whose share in the
insurance market has been rising.
As a part of overall financial sector reforms, the Government set up the
Committee for Reforms in the Insurance Sector in 1992. In its report released in
early 1994, it recommended the opening up of the sector to private sector
participation. This was done in 2000. Since then there has been rapid growth
and share of insurance in total financial savings of the economy has improved
significantly. The number of life insurance companies has increased from 13 at
end March, 2003 to 18 at end March, 2008. Competition in the industry is
increasing with new players trying to establish a significant presence. Currently
the total insurance market in India is about US$ 30 billion, in which the element
of FDI is US$ 0.5 billion. This is 1.6% of total insurance business in India.
Foreign direct investment (FDIs) will increase in insurance sector by US$ 0.46
billion in next 2 years and likely to touch US$ 0.96 billion as it is still regulated.
Currently, only 26% of FDIs is permitted in insurance sector. The total
insurance business would touch US$ 60 billion size. If insurance sector isopened up to an extent of 49% for FDIs, it is expected that FDI‘s contribution to
insurance business would touch nearly US$ 2 billion.
Insurance penetration in India is lower than in many East Asian countries. But
the penetration as a percentage of GDP has improved from 2.5 in 2005 to 4.0 in
2007 for life insurance in India
What is Insurance?
Insurance is the equitable transfer of the risk of a loss, from one entity to
another in exchange for payment. It is a form of risk management primarily
used to hedge against the risk of a contingent, uncertain loss.
An insurer, or insurance carrier, is a company selling the insurance; the insured,
or policyholder, is the person or entity buying the insurance policy. The amount
of money to be charged for a certain amount of insurance coverage is called the
premium. Risk management, the practice of appraising and controlling risk, has
evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known
relatively small loss in the form of payment to the insurer in exchange for the
insurer's promise to compensate (indemnify) the insured in the case of a
financial (personal) loss. The insured receives a contract, called the insurance
policy, which details the conditions and circumstances under which the insured
will be financially compensated.
Insurance involves pooling funds from many insured entities (known as
exposures) to pay for the losses that some may incur. The insured entities aretherefore protected from risk for a fee, with the fee being dependent upon the
Foreign direct investment(FDI) is a direct investment into production or
business in a country by a company in another country, either by buying a
company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio
investment which is a passive investment in the securities of another country
such as stocks and bonds.
Foreign direct investment has many forms. Broadly, foreign direct investment
includes "mergers and acquisitions, building new facilities, reinvesting profits
earned from overseas operations and intra-company loans". In a narrow sense,
foreign direct investment refers just too building new facilities. The numerical
FDI figures based on varied definitions are not easily comparable.
As a part of the national accounts of a country, and in regard to the national
income equation Y=C+I+G+(X-M), I is investment plus foreign investment,
FDI is defined as the net inflows of investment (inflow minus outflow) toacquire a lasting management interest (10 percent or more of voting stock) in an
enterprise operating in an economy other than that of the investor. FDI is the
sum of equity capital, other long-term capital, and short-term capital as shown
the balance of payments. FDI usually involves participation in management,
joint-venture, transfer of technology and expertise. There are two types of FDI:
inward and outward, resulting in a net FDI inflow (positive or negative) and
"stock of foreign direct investment", which is the cumulative number for a given
regulations pertaining to FIIs involves placing limits on FII ownership in Indian
companies.
The Budget announced several measures to attract foreign investment in the
form of simpler uniform registration process for different class of overseas
portfolio investors, easier access for central banks, sovereign wealth funds and
university funds to invest in India and allowing their entry into exchange-traded
currency derivatives market.
Broadly speaking, FDI entities are considered promoter group shareholders in
companies, and FIIs public shareholders, because of the way these are governedand registered under the existing guidelines. FDIs are allowed to conduct
private transactions while FIIs are not. FDIs attract up to 40% tax and are bound
by lock-in periods in their investments as promoters. On the other hand, FIIs
attract 30% tax.
Various steps to attract foreign investors are aimed at tackling the growing
current account deficit, which he said, could be addressed only three ways: FDI,
FIIs or external commercial borrowings (ECBs).
How does the Indian government classify foreign investment?
The Indian government differentiates cross-border capital inflows into various
categories like foreign direct investment (FDI), foreign institutional investment
(FII), non-resident Indian (NRI) and person of Indian origin (PIO) investment.
Inflow of investment from other countries is encouraged since it complements
domestic investments in capital-scarce economies of developing countries, India
opened up to investments from abroad gradually over the past two decades,
especially since the landmark economic liberalization of 1991.
Apart from helping in creating additional economic activity and generating
employment, foreign investment also facilitates flow of technology into the
country and helps the industry to become more competitive.
Why does the government differentiate between various forms of
foreign investment?
FDI is preferred over FII investments since it is considered to be the most
beneficial form of foreign investment for the economy as a whole.
Direct investment targets a specific enterprise, with the aim of increasing its
capacity/productivity or changing its management control. Direct investment to
create or augment capacity ensures that the capital inflow translates into
additional production. In the case of FII investment that flows into the
secondary market, the effect is to increase capital availability in general, rather
than availability of capital to a particular enterprise.
Translating an FII inflow into additional production depends on production
decisions by someone other than the foreign investor — some local investor has
to draw upon the additional capital made available via FII inflows to augment
production. In the case of FDI that flows in for the purpose of acquiring an
existing asset, no add it Moreover, FDI brings not just capital but also better
management and governance practices and, often, technology transfer. The
know-how thus transferred along with FDI is often more crucial than the capital
per se. No such benefit accrues in the case of FII inflows, although the search by
FIIs for credible investment options has tended to improve accounting and
governance practices among listed Indian companies.
According to the Prime Minister's Economic Advisory Committee, net FDI
inflows amounted to $8.5 billion in 2006-07 and is estimated to have gone up to$15.5 billion in 07-08 . The panel feels FDI inflows would increase to $19.7
by its general body in terms of RBI press release of September 20, 2001 and
FEMA Notification No.45 of the same date.
In addition, the government also introduces new regulations from time to timeto ensure that FII investments are in order. For example, investment through
participatory notes (PNs) was curbed by SEBI recently.es place as a direct result
India's public sector banks: Bank of Baroda (44 percent) and Andhra Bank (30
percent) and UKs financial and investment company Legal & General.
IMPACT OF FDI ON INSURANCE SECTOR:
The table-1 given below provides the numerical data of the selected life
insurance companies‘ premium Growth year wise, yearly premium invested by
customers in life insurance companies. In the year 2002-03 public company‘s
(LIC) was collected 546228.49 cr. in the comparison with five selected private
sector companies there were total collection 733.52 cr. we can discus in the year
2004-05 while total significant collection of public company was 75127.29 andin a comparatives with selected private companies there were total collection of
premium around 4402.29 cr. In the year 2007-08 while total collection of public
companies was 149789.99 cr. and selected private companies there were total
collection of premium 27979.99 cr. In during the last session 2009-10 public
company has been collected total premium around 1,85,985, its comparison of
selected private companies, there were total collection of premium 16,495.86 cr.The huge premium collection have increased every financial year that was
gearing insurance business in India on fast pace.
Table-1: Selected life insurance companies collected premium growth year wise (Rs. in
2007-08 still hold 74.39% and following private players hold the rest of the
market share.
The table-3 given below revealing the profit and loss summary to the selected
private life insurance companies which has been running insurance business
since 2002.We have collected yearly annual report of their companies for the
analysis it would be suffered gain or loss. The figure has taken from the selected
year; they have revealed performance to the companies, they continuous
increase loss every year all companies exception of LIC. ICICI prudential life
insurance in the year 2007-09 increase loss (18, 37,285), in the year 2009-10
increase loss (10, 33,680), in comparison we have taken figure of SBI life
insurance in the year 2005-07 increase loss(2, 415, 44) in the year 2007-09 the
companies have reduce loss 80,751 from the corresponding year 2005-07, in the
financial year 2009-10 the company has taken profit 2,548,743. In the
comparison between public company and private life insurance companies,
public company taking profit every financial year. In the opposite of selected
private life insurance companies every financial year have gone downward inthe exception of SBI life insurance such as that company in among show better
performance in his track record to reduce loss and also taking profit.
Table-3: Profit and Loss of selected companies
Name Of The Life
Insurance Co. 2005 2007 2010
LIC - 7736203 10,607,168
ICICI - (16,016,980) (35,184,918)
HDFC Std. (1,878,181) (4,421,364) (14,664,966)
SBI Life (55,040) (296,584) (16,098,612)
TATA AIG (1,794,004) (3,056,734) (16,098,612)
AVIVA (1,893,874) (4,650,081) (15,072,628)
Source: - International Referred Research Journal, August, 2011. ISSN- 0974-2832, RNI-RAJBIL
Is Higher FDI Limiting In Insurance A Threat For Public Sector
Insurers?
The huge probability of the Insurance Laws (Amendment) Bill getting an
approval in the parliament during the winter session has started to increase the
anxiety levels of Public Sector Insurers as they are already struggling to arrest
the decline in their market share. Recently, Cabinet has cleared an important
decision to increase Foreign Direct Investments (FDI) limit from 26 percent,
capped in 1999, up to 49 percent in Indian insurance companies.
During the last decade (2001-02 to 2011-12), the market share of the public
sector insurers has decreased due to new entrants in the private sector. A Zee
Research Group (ZRG) analysis reveals that Life insurance Corporation (LIC)
has been struggling to maintain the market share in segments, life and non life,
since 1999, when 26 percent FDI was allowed in the insurance sector.
Public sector insurer, LIC, in its bread and butter segment (Life segment) haslost a significant market share from 98.65 percent in 2001-02 to 71.40 percent
in 2011-12. On the other hand, during the corresponding period, the market
share of private sector life insurers has increased from 1.35 percent to 28.6
percent. With regards to the market share of LIC in the non-life segment has
decreased to 58.46 percent in 2011-12 from 95.91 percent in 2001-02. The
massive potential in the Indian life and non-life insurance sector has encouragedlarge private financial services companies to form joint ventures with global
insurers. Some of the prominent private players of this sector include the names
of Bajaj Allianz, Birla Sunlife, ICICI Prudential, Tata AIG, HDFC Standard
Life, Reliance Life, Max Life and so on.
On the declining market share of public sector insurers, S B Mathur, former LIC
Chairman, opined, ―Something has to happen when 24 private players are doing
business in the insurance sector. Increase in FDI limit can lead to greater
1. Capital for expansion: FDI has the potential to meet India‘s long term
capital requirements to fund the building of infrastructures which is criticalfor the development of the country. Infrastructure has been the major factor
which has restricted the progress of the Indian economy. Insurance sector
has the capability of raising long term capital from the masses as it is the
only avenue where people put in money for as long as 30 years even more.
An increase in FDI in insurance would indirectly be a boon for the Indian
economy, the investments not withstanding but by making more people
invest in long term funds to fuel the growth of the Indian economy.
2. Wider Scope for Growth: 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 better through marketing effort by
MNCs, better product innovation, consumer education etc.
3. Moving towards Global Practices: India‘s insurance market lags behind
other economies in the baseline measure of insurance penetration. At only
3.1%, India is well behind the 12.5% for the UK, 10.5% for Japan, 10.3%
for Korea and 9.2% for the US. Currently, FDI represents only Rs.827 core
of the Rs.3179 crore capitalizations of private life insurance companies.
4. Provide customers with competitive products, more options and better
service levels: Opening the FDI in the insurance sector would be good for
the consumers, in a lot of ways. Increasing FDI limit would impact a lot of
industries in a positive way and that we could even do without the FDI in
many other sectors for some for example in real estate.
5. According to the experts, the benefits of all kinds of FDI investments are
likely to be seen only in the future. FDI and its results is a long term
process and it will reap the benefits after a few years of initiating it. More
This change does not benefit the common man, as he is the target for all
insurance companies, whether Indian or foreign, who try to extract maximum
business from the gullible public, who are carried away by the sweet talk and
tall promises made by the insurance salesmen. In fact they are concerned more
about their own commission rather than the welfare of the insured. Insurance
business is one where there is rampant mis-selling and the insurance
companies go scot free because of a number of conditions included in the policy
in small print, but never communicated in advance.
Our country has a low insurance density and every company selling the
insurance feels that there is abundant scope to expand its operations and hence
this proposal to increase FDI in insurance has been received with great applause
by the industry. Only time alone will tell whether this irrational exuberance is
justified considering the fact that there is political opposition to this move and
this change requires approval of the Parliament.
If and when this proposal becomes a law there is bound to be a great demand
from foreign companies to enter our country because of the abundant
opportunity provided by the large population and the growing per capita income
of our people. During the last twelve years, if over 40 foreign companies have
entered our country as joint venture partners, with the increased FDI cap, we
may expect another 100 companies to come within the next twelve years.
Unfortunately, some of our people are carried away by the foreign names and brands, and that there is a perception among our people that foreign companies
are better than the home-grown companies. But the fact is that foreign
companies are as bad as or as good as local companies, and insurance business,
whether run by Indians or by foreigners has the same objective, as in all
business, of maximizing returns to the owners even at the cost of the insured.