Published : Wednesday, 06 August, 2014 11:42 AM
MBA aspirants must be updated with General Awareness on current topics. General awareness topics with analytically drawn conclusions will benefit you in Essay writing / GD & PI. Today, you will read General Awareness Topic: FDI in Insurance: Threat or Opportunity
As the government had announced to introduce the Insurance Laws (Amendment) Bill in the current session of Parliament and can even call for a joint session of Parliament to get the bill passed, vehement opposition is reported from various quarters including political parties, trade unions and obviously from employees union of life and general insurance companies. The amendment bill seeks to increase the Foreign Direct Investment (FDI) limit in Insurance sector by up to 49 percent.
The insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999. This Act permitted foreign shareholding in insurance companies to the extent of 26 per cent with an aim to provide better insurance coverage and to augment the flow of long-term resources for financing infrastructure
Currently, 26 percent FDI is permitted under automatic route. FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. If the bill is passed, FDI between above 26 percent and up to 49 percent will be permissible through automatic route.
Various stake holders have criticised the move on various grounds. For instance, left parties criticised the move arguing that presence of private FDI in insurance sector will jeopardize stability of financial market but they didn’t explained how it will jeopardize financial market. Bhartiya Mazdoor Sangh (BMS, trade union supported by BJP) opposed increase in FDI because according to them only Indian insurance companies stand strong while the US insurance company became bankrupt during financial crisis. However, the proponents of FDI cite following benefits –
- The insurance sector is investment starved. Several segments of the insurance sector need an expansion. The move will bring the much needed long-term capital into the companies
- If the higher foreign direct investment limit is raised in insurance sector, it could result in inflows of INR 40,000-60,000 crore over time.
- Lack of funds has limited the ability of these companies to increase insurance penetration. Life insurance penetration in India is about 3.2 percent of gross domestic product in terms of total premiums while the global average is 8 percent. Higher FDI limit could help in deepening the insurance penetration in India.
- FDI could help in job creation in the sector. Higher capital will help insurance companies to tap under-insured markets through better infrastructure and more manpower.
- The higher FDI limit in insurance would also be beneficial for the pension sector. The Pension Fund Regulatory Development Authority (PFRDA) Bill ties the FDI limit in pension sector to that of the insurance sector.
- Investors generally invest in insurance and pension products on a long-term basis and this money could help fund infrastructure projects, which requires long-term funding.
- New companies will infuse efficiency, new products and competition in the market.
However, any new move must also answer the concerns of different stake holders. Failure of AIG in US has no analogy in India because the US market is very little regulated while Indian market is well regulated by Insurance Regulatory and Development Authority (IRDA). There are some genuine risks with the move, but with regulatory infrastructure in place, a risk which comes with INR 60,000 crores, efficiency, new products etc is worth welcoming.