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Insurance Amendment Bill (19 March 2021)

Insurance Amendment Bill (19 March 2021)

Context:

  • The Rajya Sabha has passed the Insurance (Amendment) Bill, 2021 that seeks to raise the FDI in insurance sector to 74 per cent from the current 49 per cent. Replying to the discussion on the Bill, Finance Minister Nirmala Sitharaman said higher foreign investment would help insurance companies meet their rising capital requirements and also help in furthering insurance penetration in the country. 

Background:

  • The Bill seeks to amend the Insurance Act, 1938.

  • Members of the opposition parties raised concerns over the issue of ownership, and demanded that the Bill be sent to a Standing Committee.

  • Foreign investment in the insurance sector was first permitted in the year 2000 up to 26%.

  • By an Amendment Act of 2015, this limit was raised to 49% of the paid-up equity capital of such company, which is Indian owned and controlled.

Summary of the Debate

Key Highlights of the Bill:

  • The Bill increases the limit on foreign investment in an Indian insurance company from 49% to 74%.

  • Foreign investment may be subject to additional conditions as prescribed by the central government.

  • It also has a provision for removal of restrictions on ownership and control of the insurance companies.

  • 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 trust and vested with trustees who must be residents of India.

How it will increase insurance penetration in the country?

  • The insurance sector requires a lot of funds and over the years beginning from the year 2000, there have been attempts to increase the FDI insurance.

  • In 2000, the 26 percent FDI was permitted in insurance sector then subsequently in 2014, the 26 percent went to 49 percent

  • The insurance sector is capital intensive, it requires large volumes of money and by having this 74 percent FDI in insurance sector, it will ensure that a lot of not only fresh capital will come in from fresh companies but even companies that today are already in joint ventures with local companies, they will probably put in more money.

  • Given the current joint venture structure, the equity has to be shared between the foreign investor and the Indian investor, the two joint venture partners.

  • Now, a lot of times the Indian joint venture partner may find it difficult to get its required share of capital, so what this does is that it allows the foreign investor to get in up to 74 percent of the capital equity requirement.

  • So, even if the Indian partner has some financial constraint and is unable to get that capital, the foreign investor or a group of foreign investors can come together and provide that capital. 

  • This has been a demand ever since the sector was opened up in 2000 that you allow higher level of foreign investment and it's been a very contentious issue ever since a private sector was allowed in insurance, after it was nationalized.

  • The finance minister mentioned that between 2014 and 2020, when the insurance sector was opened up from 26 percent to 49 percent, 26 000 crores has come into this sector.

Kind of safeguards that this law provides:

  • The majority of the directors will be from India, they will be based in India.

  • The key management personnel will also be Indians. 

  • Fifty percent of the directors will be independent directors and a certain percentage of the profits will be retained as reserve in India.

  • But the only fear is that if you allow 74 percent of FDI and everything will be in the hands of resident Indians, then how many foreign companies will want to put money into in such a kind of situation.

How will we get people to repost the same trust that they have in public companies to also have in the private companies?

  • LIC has an undue advantage over its rivals, it has a sovereign guarantee from the government.

  • Apart from being a public sector nationalized entity, governed by a special law, it also comes with a sovereign guarantee. So, the government has insured people for any possible loss.

  • It's essentially the comfort that the stakeholder or the insurer or the customer of a bank feels when he deals with the public sector entity.

  • In the private sector, there even if it if the company is a very good company, there is always that niggling fear that tomorrow something would go wrong and if something goes wrong then what happens to their money that they put into that financial enterprise.

  • But the private sector has made sufficient inroads on the life insurance side particularly general insurance, they have done better, but on the life insurance side they've done sufficiently well with attractive products, with good quality service and that has certainly led to people moving away from LIC to some of the private insurers.

  • Besides, most of the private insurers are backed by very strong promoters.

How do we get in more and more people to buy insurance?

  • India’s average insurance premium as a percentage of GDP is around 3.7 percent whereas the global average is almost double.

  • In India, we also look at insurance as an investment product which it is not, it is essentially a product to cover the life risk.

  • We need to catch up quite a bit now, one of the main ways of doing it is for the economy to grow faster because the more incomes you have, the more insurance people will take out, the higher will be the quantum of insurance and so on. So, higher insurance penetration will arise basically from higher levels of income.

  • People should be aware that they need to ensure themselves or their family in case of any mishaps.

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