RBI, IRDAI nod must for FDI in bank-led insurance

Context:

Applications for foreign direct investment in an insurance company promoted by a private bank would be cleared by the RBI and IRDAI to ensure that the 74% limit of overseas investment is not breached.

Relevance:

GS-III: Indian Economy (Economic Development in India, Government Initiatives to overcome Challenges in Economic Development)

Dimensions of the Article:

1. What is Insurance?
2. Insurance sector of India
3. About the Insurance Amendment Bill 2021
4. Impacts of the Amendment 
5. About IRDAI

What is Insurance?

• Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
• Insurance is a capital-intensive business so has to maintain a solvency ratio. The solvency ratio is the excess of assets over liabilities.
• Simply put, as an insurance company sells more policies and collects premiums from policyholders, it needs higher capital to ensure that it is able to meet future claims.

Insurance sector of India

• The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 percent.
• Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
• In addition to these, there is a sole national re-insurer, namely the General Insurance Corporation of India (GIC Re).
• Other stakeholders in the Indian Insurance market include agents (individual and corporate), brokers, surveyors, and third-party administrators servicing health insurance claims.
• Nationalization of life (LIC Act 1956) and non-life sectors (GIC Act 1972) and the constitution of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999 are the major legislation’s regarding insurance sector in India.
• The opening up of insurance sector to both private and foreign players in 2000 and the increase in the foreign investment cap to 26% from 49% in 2015 are the first steps towards privatisation of the insurance sector.
• The notification of 100% foreign direct investment (FDI) for insurance intermediaries (announced in the Union Budget of 2019-20) has further liberalised the sector.

About the Insurance Amendment Bill, 2021

• The Insurance Amendment Bill, 2021, seeks to amend the Insurance Act, 1938.
• The Insurance Act, 1938 provided the framework for functioning of insurance businesses and regulates the relationship between an insurer, its policyholders and its shareholders. It also had provisions regarding the regulator (the Insurance Regulatory and Development Authority of India).

Amendments in the Bill

• The Bill seeks to increase the maximum foreign investment allowed in an Indian insurance company.
• The Act allows foreign investors to hold up to 49% of the capital in an Indian insurance company, which must be owned and controlled by an Indian entity.
• The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%, and removes restrictions on ownership and control. However, such foreign investment may be subject to additional conditions as prescribed by the central government.
• The Act requires insurers to hold a minimum investment in assets which would be sufficient to clear their insurance claim liabilities.
• If the insurer is incorporated or domiciled outside India, such assets must be held in India in a trust and vested with trustees who must be residents of India. The Act specifies in an explanation that this will also apply to an insurer incorporated in India – and the Amendment removes this explanation.

Impacts of the Amendment

• The FDI limit increase is also expected to provide access to fresh capital to some of the insurance companies, which are struggling to raise capital from their existing promoters.
• This would not only increase the solvency position for some insurers but would provide long-term growth capital for other companies to invest in newer technologies.
• These technologies would not only help in managing losses but also in customer acquisition and thus insurance penetration.
• The additional funds could be used to invest in technology to adapt to the evolving customer needs like responsive service through digital platforms.
• It is an important shift in stance as the increase in the FDI cap means insurance companies can now be foreign-owned and -controlled as against the current situation wherein they are only Indian-owned and -controlled.
• The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76 per cent, as against a global average of more than 7 per cent.

How this impacts Indian promoters of insurance companies?

• Most of the Indian promoters of insurance companies are either Indian business houses or financial institutions like banks.
• Many entered into the insurance space when they were financially strong but are now struggling to cater to the constant need to infuse capital into their insurance joint ventures.
• Over the years, the sector has seen large-scale consolidation and exits of many promoters.
• A higher FDI cap will mean that more promoters could now completely exit or bring down their stakes in their insurance joint ventures.

What higher does FDI mean for policyholders?

• Higher FDI limits could see more global insurance firms and their best practices entering India.
• This could mean higher competition and better pricing of insurance products.
• Policyholders will get a wide choice, access to more innovative products, and a better customer service and claims settlement experience.

About IRDAI

• The Insurance Regulatory and Development Authority of India or the IRDAI is the apex body responsible for regulating and developing the insurance industry in India.
• It is an autonomous body. It was established by an act of Parliament known as the Insurance Regulatory and Development Authority Act, 1999. Hence, it is a statutory body.
• The IRDAI is headquartered in Hyderabad in Telangana. Prior to 2001, it was headquartered in New Delhi. 

Functions of IRDA

• Its primary purpose is to protect the rights of the policyholders in India. 
• It gives the registration certificate to insurance companies in the country.
• It also engages in the renewal, modification, cancellation, etc. of this registration.
• It also creates regulations to protect policyholders’ interests in India.

Composition of IRDA

The Section 4 of the Insurance Regulatory Development Authority (IRDA) Act, 1999 specifies the composition of authority which consists of 10 member team appointed by the government of India which includes.

• One chairman
• Five whole time members
• Four part time members

-Source: The Hindu