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Foreign direct investment in insurance sector baby veena j ohnPresentation Transcript
Foreign Direct Investments In the Insurance Sector in India By Adv. Baby Veena John Altacit Global Email: firstname.lastname@example.org Website: www.altacit.com
Introduction The concept of Insurance emerged thousands of years ago. It is said that the Chinese used to divide their cargoes among many boats to reduce the severity of loss from perils of sea. Marine insurance emerged in London when the ships started sailing for the New World. Fire insurance arose from the great fire of London in 1666, in which 14,000 buildings were destroyed. In 1759, Benjamin Franklin established the first life insurance company. In 1887, the first auto-liability policy was written.
Historical Perspective 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 The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods,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 Insurance Sector in India 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.
Contd……. 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 societies—245 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 Governing 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.
Insurance Regulatory and Development Authority Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. Accordingly the Indian insurance industry was thrown open to private and foreign investment in 1999-2000.
The Act sought to ensure orderly growth of the insurance industry. The Act of 1999 amended the Insurance Act 1938, the Life Insurance Act 1956 and the General Insurance Act 1972. According to IRDA, a private sector participant has to fulfill the following criteria for entry into insurance sector. Minimum paid up capital of Rs. 100 crores Investment in policy holders funds only in India Restriction of international companies to minority equity holding of 26%
Sec.2 (7A), The Insurance Act, 1938 As per Sec.2 (7A), incorporated in 1999 in the Insurance Act, 1938, "a foreign company's stake in the equity of an Indian insurance company shall not exceed 26 per cent, whether held by itself or through its subsidiary companies or nominees.'' This means that four foreign companies can together exercise 100 per cent control over an Indian life insurance company. The important point that comes out from the incorporation of Sec. 2(7A) of the Insurance Act is that the Government did not want to place any cap on FDI in the insurance sector.
A restriction has however been placed by a subordinate legislation, the IRDA Regulations 2000, in respect of registration of Indian insurance companies. This places a cap of 26 per cent on the aggregate foreign investment. This restriction is however temporary in nature and the Government can, at any time, direct the IRDA to amend this regulation in step with Sec. 2(7A).
The Insurance Amendment Bill The Insurance Bill was introduced in the RajyaSabha 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; To allow foreign reinsurers like Lloyd’s of London, to open branches in India. To lower the capital requirement of standalone health insurance companies to Rs. 50 crore from 100 crore. To allow insurance companies to appoint insurance agents, surveyors and loss assessors
Changes in FDI Rules The Government has decided to review the guidelines for foreign direct investment and has proposed extensive changes in the guidelines. Proposals include; 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.
Interesting Statistics 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 country’s 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