Final

The ForeignDirectInvestment(FDI) isaglobal phenomenon,highonthe agenda of all countries, rich or
poor, in the current era of interdependent world order. The 21st
century has shrunk the world into a
global village where nonationcanlive inisolationand yet prosper. The international organizations like
the UN agencies highlight the need to shed protectionism in trade practices by all countries.
As perthe UnitedNationsConference onTrade andDevelopment(UNCTAD),FDIinflowsduringthe year
2011 increased across all major economic groupings viz. developed, developing and transitional
economies; in the year 2012, there was a steep fall in the developed world, a small decline in the
developingcountriesbutahuge rise inthe structurallyweakeconomies.However, in the year 2013, FDI
inflowsrose againwithdevelopingcountriesmaintainingtheir lead. Hence, the need for FDI is not only
inthe developingorthe underdevelopedcountriesbutalsointhe developed world. The poor countries
may require the FDI mostly for developmental purposes e.g. for building good infrastructure or to
addressthe problemsof unemployment etc. The developed world favours it globally to overcome the
economic recession it recently faced; the developed world even fears its reoccurrence.
It ishearteningtoknowthat some Indiancompaniesprovidedample jobstoUScitizensboth in USA and
inIndiaand thus,helped the USA overcome its current economic slowdown. The Government of India
has alsobeentryinghardto get increasedinflow of FDIinvarioussectors,including insurance sector, of
itseconomy.The Governmentnowproposestoincrease the FDI to the extent of 49% from the existing
26% in insurance industry; it also proposes more FDI in other sectors, including the sensitive Defence
and Security sectors.
Notwithstanding the global nature of FDI, it is undoubtedly the urgent need of developing countries
especially the present–day India which is economically challenged. It has 4.7% GDP growth (2013-14),
3% urban unemployment (2013, NSSO method), around 10% inflation (2013) and 1.7% current account
deficit(2013).Toattract FDI,Indiahad earliertried different routes e.g. investment sought through tax
incentives in backward areas, public private partnerships and through establishing special economic
zones. It had even allowed 100% FDI in many sectors during the year 2000. However, the FDI inflow in
Indiaexhibitsachequeredhistory. Since 2000, there was an increase inthe FDIinflowswhichreached $

9 billioninthe year2006. Itfurtherincreasedtoa record high of $ 46.9 billion in the fiscal year 2011-12;
it however dropped to $ 36.9 billion in the year 2012-13.
According to the data available from the UNCTAD Report, FDI inflow in India is 4.3% of its Gross Fixed
Capital Formation as compared to global average of 8.3%.Also, FDI stocks in India, as a percentage of
GDP, stands at 12.2% in contrast to the ratio for developing countries at 30.4%. It shows that there is
urgent need as well as considerable scope to expand FDI in India.

CONCEPTUAL FRAMEWORK
A. DEFINTION AND IMPORTANCE OF FDI
Accordingto IMF, whenone individual orbusinessowns10% or more of a foreigncompany'scapital,itis
definedasForeignDirectInvestment.Everyfinancial transactionafterwards is considered as additional
directinvestmentby it. The IMF further describes it as "investment made to acquire lasting interest in
enterprisesoperatingoutside of the economy of the investor. The FDI relationship consists of a parent
enterprise and a foreign affiliate which together form a Multinational corporation (MNC).”
FDI isconsidered importantbecause it helps in the long-term economic development of a country not
only as a source of capital but also through transfer of developed technology together with the best
global management practices. Due to the large inflows of capital from the foreign investor, it helps in
domestic industrial development of the receiving country thereby increasing its employment
opportunities.
B. FDI SYSTEM IN INDIA
The FDI systemin India isa policyframeworkinthe formof Circularon ConsolidatedFDI Policy which is
regularly updated each year to incorporate the changes. The Department of Industrial Policy and
Promotion(DIPP),Ministryof Commerce &IndustrymakespolicypronouncementsonFDIthroughPress
Notes/Releases which are notified by the Reserve Bank of India as amendments to Foreign Exchange
Management Regulations 2000.
FDI is received in India under two routes: (a) Automatic route: Through it, FDI is allowed in activities
which do not require prior approval either of the Government or the Reserve Bank of India. And, (b)

Government Route: FDI in activities other than the automatic route requires prior approval of the
Government which is considered by Foreign Investment Promotion Board (FIPB), Department of
Economic Affairs, Ministry of Finance.
India, in the initial years, mainly adhered to the socialist policies and continued to remain largely a
closed economy with emphasis on protectionism and import substitution. Attempts were, however,
made in 1966 and 1985 to liberalise the economy but these did not succeed. It was only in 1991 when
India was going through a balance of payment crisis that the IMF insisted upon India to undertake a
seriesof structural economicreforms with a view to attain rapid economic growth through integration
with the global economy. The reforms of 1991 reduced requirements of industrial licensing, removed
restrictionsoninvestmentandexpansionandpermittedeasyaccessto foreign technology and FDI. The
Government thus opened its doors to FDI inflows under Foreign Exchange Management Act and
adopted a more liberal foreign policy.
FDI has, so far, been permitted in various sectors like Services both financial and non-financial,
telecommunications,constructionactivities,computerhardware andsoftware,housing and real estate,
drugsand pharmaceuticals,power,automobile industry,metallurgical industries,petroleumandnatural
gas. According to FDI statistics of Department of Industrial policy and Promotion (DIPP), the Services
sector constitutes the highest FDI equity inflows in India during the last four years with banking,
insurance and financial services being one of them.
The overall liberalisation policy yielded the expected results; it brought millions of dollars into the
country.In 2001, whenIndiawasdescribedasalong-term growth opportunity by Goldman Sachs Brics,
there wasthe FDI inflowinthe countryto the tune of $ 3-5 billion each year till the year 2006; it rose to
$ 30-40 billion each year since the year 2007. The following table shows the amount of FDI inflows in
India since 1999.

Table 1: FDI inflows in India since the year 1999
Period FDI inflows (US $ billion)
1999-2004 19.52
2004-09 114.55
2009-Sept 2013 172.82
Source:
Further, during FY 2013-14, India attracted FDI worth US $ 36.40 billion as against US $ 22.42 billion in
FY 2012-13.
C. FDI IN INSURANCE – A HISTORICAL OVERVIEW
Before the year 1956, a large number of insurance companies co-existed in India and the level of
competition was high. At that time, allegations of unfair trade practices against the insurers was also
high.Therefore, the Government of India decided to nationalize insurance business and an ordinance
was passedinJanuary, 1956 that nationalized the insurance sector. Life Insurance Corporation of India
(LIC) came into existence in the same year and absorbed 245 Indian and foreign insurance companies.
The LIC had monopolytill late 1990s whenthe insurance sector was reopened for private participation.
Foreign companies were allowed to enter the insurance industry through joint ventures with Indian
companies. However, FDI was permitted only to the extent of 26 per cent.

Since liberalizationandprivatization, the number of insurance companies operating in India increased
whichfurtherraisedthe level of competition amongst the insurers. Presently, as joint ventures, there
are abouttwo dozenprivate lifeinsurance companies besides 21 private general insurance companies
whichinclude 4healthinsurance companies. Table2 below showsthe break-upof insurance companies.
Table 2: Registered Insurers in India (As on 30th
September, 2013)
Type of Business No of Public Sector
Companies
No of Private Sector
Companies
Total Companies
Life Insurance 1 23 24
General Insurance 6 21 27
Re insurance 1 0 1
Total 8 44 52
Source: IRDA Annual Report 2012-13
There has beenasignificantgrowthin FDI inflows in the last 5 years both in life and non-life insurance
sector. The total equity share of foreign investors in life insurance companies has gone up from Rs.
4354.5 crores in 2008-09 to Rs. 6045.91 crores in 2012-13. Similarly, foreign investors’ investment in
general insurance companies has increased from Rs. 621.72 crores in 2008-08 to Rs. 1586.63 crores in
2012-13.

Table 3: Total Equity Share of Foreign Investors in Insurance Companies in India
Total Equity Share of Life and General Insurance Companies Purchased by Foreign Investors (Rs.
Crore)
31st March
2009
31st March
2010
31st March
2011
31st March
2012
31st March
2013
Life
Insurance 4354.5 5053.98 5723.81 6324.27 6045.91
General
Insurance 621.72 896.32 1090.08 1324.45 1586.63
Source: IRDA Annual reports 2008-09, 2009-10, 2010-11, 2011-12 and 2012-13
It is interesting to note that even after an increased participation through FDI, the private sector
insurance companies had shown a decline in customer strength. Further, the ratio of premium
underwritteninagivenyear to GDP (insurance penetration) of India remains relatively low at 0.78 per
cent for non-life business and 3.17 per cent for life business; quite behind the ratios of the United
Kingdom (12.5 per cent), Japan (10.5 per cent), South Korea (10.3 per cent) and the United States (9.2
per cent).
An exhaustive effort is required to analyse the real reasons behind such dismal performance. There is
needtoknowif it iscausedby lowpercapita income of Indians or itis due to customers’non-awareness

of goodinsurance productsandtheirpotential benefits orthe real cause is unethical business practices
used by the private insurance sector. The current challenge can be met through immediate corrective
measures which include the need to reduce the cost of acquiring new customers, improving upon the
distributionnetworkforeffective spreadof awareness,creatingcustomer-oriented insurance products,
inculcatingthe spirittoavoidunethical businesspractices,aspeedy procedure for settlement of claims
and developing a mechanism for harmonious redressal of customers complaints.
NEED FOR INCREASING FDI IN INSURANCE
With 52 insurance companies, the insurance sector in India is one of the largest in the world
expressed in terms of volume of money. And yet, the insurance penetration happens to be
relatively low. This gap between the market size and market cover is the biggest hurdle of this
sector. The total market size of insurance sector has been US $ 66.4 billion as of FY 2013 and is
expected to grow to US $ 350-400 billion by 2020.
The insurance sector in India is no doubt growing and is expected to grow further and the
imperative need for the purpose is the immense inflow of FDI which shall bring in the needed
capital, competition, innovation and efficiency and would also help in improvement in the
insurance penetration in hard-to-reach rural areas. The current proposal of the Government to
increase the FDI in insurance sector to 49% should be correctly viewed as an urgent need of the
sector.
The hike, however, requires an amendment to the Insurance law. The Union Cabinet has
officially approved the amendments made in the Insurance Bill in which the FDI limit has been
raised from 26 percent to 49 percent and the Insurance Bill is expected to be introduced in the
Rajya Sabha in the coming future. The increase, once done, shall hopefully help in bringing best
international practices for greater efficiency in the sector.

V. ARGUMNETS FOR AND AGAINST THE INCREASE IN FDI CAP IN INSURANCE
The increase in FDI limit to 49 per cent shall only be allowed once it gets prior approval of the
Foreign Investment Promotion Board (FIPB). Moreover, the Insurance Bill propagates that
management control of the insurance companies must remain with Indian players only.
There are both supporters as well as the opponents of the proposed hike.The proponents of the
increase argue:
 That the current insurance sector is starved of capital and is unable to grow. It is
estimated that the sector currently requires $ 5 to 6 billion to expand and improve its
current penetration level. An increased FDI can only meet this need as the capital market
is not capable of doing so.
 Along with more funds, the foreign firms shall bring better insurance products and
also superior technological capabilities that may help the industry in effectively settling
claims, underwriting and other key processes to the satisfaction of its customers. Hence,
the FDI increase would, in ultimate analysis, be for the benefit of the policyholders.
 The enhanced FDI would add depth and competitiveness in the Indian scenario by
providing better products coupled with superior service levels to the customers. A larger
inflow of capital and fresh breeze of ideas would also help in training the marketing
personnel to adopt ethical practices in a bid to redress customers’ grievances and help
grow their numbers.
 The hike in FDI is needed for crucial infrastructural needs. Only a better
infrastructure shall work both ways; it shall help in employment generation in the
receiving country and also encourage the foreign investor to pump in more funds.
 A higher FDI limit in the insurance sector would also facilitate FDI norms in the
pension sector.

The NDA Government apparently seems to sell the proposed hike in the name of national
interest. However, organizations like All India Insurance Employees’ Association (AIIEA), The
North Zone Insurance Employees Association (NZIEA) are opposed to the government's
proposal which they feel shall do no good to the country.
Those opposing the proposedhike argue:
 That the Government's decision is truly in favour of western countries like United States,
France, United Kingdom etc. and that it shall neither benefit the Indian economy nor its
insured public. Their argument is that insurance is a medium through which small savings
are mobilized for long term investments and hence, allowing foreign capital to have
greater access and control over domestic savings would be dangerous and harmful to the
Indian economy.
 The opponents do not find the Government's argument convincing that FDI alone can
help grow the insurance sector. They argue that private sector companies have Indian
promoters who possess not only huge funds to invest but they can also raise more capital
from the domestic market, in case of need. Hence, the necessity for increase in FDI is not
justified. They further argue that experience of last 10 years show that even with 26%
FDI the Indian companies have done better than their counterparts in other countries. For
example, while in the US, there are 1000 insurers, the gross premium annually collected
is around $ 700 billion, whereas in India with only 52 participating firms, the gross
premium collected is to the tune of $ 50 billion.
 The level of insurance penetration, the opponents maintain, depends upon the economic
growth and availability of disposable income in the hands of the common man rather than
the quantum of competition between private and public sector. The Indian economy grew
from 5.5% in 2000 to 10.1% in 2010 when incidentally this sector was opened up; hence
the insurance penetration rate remained on the ascending side. However, there has been
de-growth and slowdown in the last four years; it has impacted all sectors of the economy
including insurance. There has been a huge drop in domestic savings; and there was also
a decline in financial savings rate which resulted in lower collection of premiums even
for the foreign companies. Consequently, some of these were forced to exit from India
(Sun Life) and few others are in the process of doing so.

 The opponents hold that FDI alone is not the determining factor to judge the performance
of this sector. While the private insurance sector has been enjoying the fruits of FDI for
the last 10 years, it has not done as good as the state-owned LIC and other public general
insurance companies. Hence, more than the FDI, the real determinant of growth of this
sector is the credibility factor coupled with its customer-oriented products. It is also
proved by the performance of the LIC during the years 2012 and 2013 which was far
better than the performance exhibited by the private life insurance sector. Hence, it is
important to understand that growth of insurance sector cannot be fostered only through
foreign capital.
 The opponents dispute the Government's argument that flow of significant portion of
global premium income earned by the foreign partners would be reinvested in
infrastructure in India. The contention remains fallacious since there is no evidence to
prove the claim on the basis of available experience of the last 10 years.
 The opponents argue that it is a myth to believe that increase in FDI will ultimately
benefit the policyholders by bringing in new technology and innovative products. An
insurance cover is a means to provide protection to the common man from unforeseeable
difficult circumstances. The insured person prefers to take a cover from a company which
can provide him protection and can settle his claim quickly when he is in dire need of it.
A look at the data published by IRDA shows that the claim settlement ratio of LIC is far
better than the private life insurers; it is in fact the best in the world with 97.73 per cent of
claim settlement. While the private life insurance players had repudiated around 8% of
death claims, it was only 1.12% of LIC.Similarly, the lapse ratio of policies of the private
life insurance companies was around 25% in 2012-13 as compared to 5.6% of LIC. The
opponents point out that a large number of private companies also indulged in mis-selling
of policies and hence, the lapsation ratio was quite high in the private sector. The private
players, ironically, made profits through such high lapsation of policies.

 According to the opponents, the public sector life and general insurance companies, of
late, have started acquiring advanced levels of technology and thereby, created customer-
oriented products in order to continue their hold on huge market share. These companies
are once again endeavouring to develop their products keeping in mind the needs of their
clients and not merely for profit- making purposes.

What are the ultimate benefits of increasedFDIin Insurance sector?
1. Insurance products: Private as well as government insurers will benefit from
the proposed hike of FDI; these companies will offer better and wide range of
insurance products to customers at larger competitive prices.
2. Smaller Companies: FDI will help smaller insurance companies to break-even
faster and help monetize (convert into currency) the holdings of the promoters of
the older life insurance companies.
3. Capitalinflow: Immediate capital inflows of $2 billion and long term inflows
of about $10 billion can be expected.
4. Aggression: The industry has been cautious in selling products which are capital
intensive, it will be able to become more aggressive.
5. Technology:Insurers will not just get capital but also technology and product
expertise of the foreign partner who is the domain expert.
6. New Players: We can expect about 100 life and non-life insurance companies to
serve a market of our size. Increasing FDI could see 25-30 new insurers entering
the market.
7. State-RunCompanies: People in the country have more faith on government
insurance companies and less on private ones, this hike will benefit the state-run
companies more than the private ones.
8. Penetration: With the population of more than 100 crores, India requires
Insurance more than any other nation. However, the insurance penetration in the
country is only around 3 percent of our gross domestic product. Increased FDI
limit will strengthen the existing companies and will also allow the new players to
come in, thereby enabling more people to buy life cover.
9. Employment: With more money coming in, the insurance companies will be
able to create more jobs to meet their targets of venturing into under insured
markets through improved infrastructure, better operations and more manpower.

Issues in FDI in Insurance Sector
1) Efficiency of the companies with FDI
The opening up of this sector for private participation in 1999, allowed the private
companies to have foreign equity up to 26 per cent. Following this up 12 private sector
companies have entered the life insurance business. Apart from the HDFC, which has foreign
equity of 18.6%,all the other private companies have foreign equity of 26 per cent. In general
insurance 8 private companies have entered, 6 of which have foreign equity of 26 per cent.
Among the private players in general insurance, Reliance and Cholamandalam does not have
any foreign equity. The aggregate loss of the private life insurers amounted to Rs. 38633 lakhs in
contrast to the Rs. 9620 crores surplus (after tax) earned by the LIC. In general insurance, 4 out
of
the 8 private insures suffered losses in 2002-03, with the Reliance,a company with no foreign
equity, emerging as the most profitable player. In fact the 6 private players with foreign equity
made an aggregate loss of Rs. 294 lakhs. On the other hand the public sector insurers in general
insurance made aggregate after tax profits of Rs. 62570 lakhs.
2) Credibility of foreign companies
The argument that foreign companies shall bring in more expertise and professionalism
into the existing system is debatable after the recent incidents of the global financial crisis where
firms like AIG, Lehman Brothers and Goldman sachs collapsed. Earlier too, the Prudential
Financial Services (ICICI’s partner in India) faced an enquiry by the securities and insurance
regulators in the U.S based upon allegations of having falsified documents and forged
signatures and asking their clients to sign blank forms. This was after it made a payment of $2.6
billion to settle a class-actionlawsuit attacking wrong insurance sales practices in 1997 and a $
65
million dollar fine from state insurance regulators in 1996.AMP closed its life operations for
new business in June 2003. Royal Sun Alliance also shut down their profitable businesses in
2002. A recentreport by Mercer Oliver Wyman, a consultancy, found that European life
insurance companies are short of capital by a whopping 60 billion Euros. According to the
Mercer Oliver Wyman Report the German, Swiss, French and British insurers suffer from severe
capital inadequacy, which is a result of undertaking risky investment in equity and debt
instruments in the past. Hence FDI in insurance in India would expose our financial markets to
the dubious and speculative activities of the foreign insurance companies at a time when the
virtues of regulating such activities are being discussed in the advanced countries.
3) Greater channelization of saving to insurance
One of the most important duties played by the insurance sector is to mobilize national
saving and channelize them into investments in different sectors of the economy. However, no
significant change seems to have occurred as far as mobilizing savings by the insurance sector
isconcerned even after the liberalization of the insurance sector in 1999.Therefore the private or
foreign participation has not been able to achieve the goal.

4) Flow of funds to infrastructure
The primary aim of life insurance is about mobilizing the savings for the development of
the economy in long term investment in social and infrastructure sectors. The same vision was
argued for the opening up of insurance market would enable huge flow of funds into
infrastructure. But more than fifty percent of the policies they sell are ULIPS where the
investments go into the equity markets. As per a report, 95% of policies sold by Birla Sun Life
and over 80 percent of policies sold by ICICI Prudential were unit-linked policies during
2003-04. Under these schemes, nearly 50 percentof the funds are invested in equities thus
limiting the
fund availability for infrastructural investments. On the other hand, the LIC has invested Rs.
40,000 crore as at 31.3.2003 in power generation,road transport, watersupply, housing and
other social sector activities. IRDA figures further imply that the share of the public sector life
and non-life insurance companies in investment in infrastructure is greater than their market
share.
Advantages of FDI in Insurance Sector
1) Capital for Expansion
FDI has the potential to meet India’s long term capital requirements to fund the building
of infrastructures which is critical for 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 investment 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 crore of the Rs.3179
crores 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 will impact on a lot of industries in a positive

HISTORY OF INSURANCE
The history of general insurance dates back to the Industrial Revolution in the west and the
consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a
legacy of British occupation. General Insurance in India has its roots in the establishment of
Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian
Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of
general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance Association of
India. The General Insurance Council framed a code of conduct for ensuring fair conduct and
sound business practices.
In 1968, the Insurance Act was amended to regulate investments and set minimum solvency
margins. The Tariff Advisory Committee was also set up then. In 1972 with the passing of the
General Insurance Business (Nationalisation) Act, general insurance business was nationalized
with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four
companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd.,
the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General
Insurance Corporation of India was incorporated as a company in 1971 and it commence
business on January 1sst 1973.
This millennium has seen insurance come a full circle in a journey extending to nearly 200
years. The process of re-opening of the sector had begun in the early 1990s and the last decade
and more has seen it been opened up substantially. 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 complement the reforms initiated in the financial sector. 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.
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.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the
power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000
onwards framed various regulations ranging from registration of companies for carrying on
insurance business to protection of policyholders’ interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a national
re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.
Today there are 27 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 24 life insurance companies operating in the country.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with
banking services, insurance services add about 7% to the country’s GDP.

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.
INSURABLE INTEREST
Insurable interest exists when an insured person derives a financial or other kindof benefit from the continuous existence of the insured
object (or in the context of living persons, their continued survival). A person has an insurable interest in something when loss-of or
damage-to that thing would cause the person to suffer a financial loss or other kind of loss.
Typically, insurable interest is established by ownership, possession, or direct relationship. For example, people have insurable interests
in their own homes and vehicles, but not in their neighbors' homes and vehicles, and certainly not those of strangers.
The "factual expectancy test" and "legal interest test" are the two major concepts of insurable interest.
Property insurance
People have an insurable interest in their property up to the value of the property, but not more. The principle of indemnity dictates that
the insured be compensatedfor a loss of property, but not for more than what the property was worth. A lender, who accepts a house as a
mortgage, has an insurable interest on the property used as security, but the insurable interest is not in excess of the value of the loan.
INSURABILITY
Insurability can mean either whether a particular type of loss (risk) can be insured in theory, or whether a particular client is insurable
for by a particular company because of particular circumstance and the quality assigned by an insurance provider pertaining to
the risk that a given client would have.
An individual with very low insurability may be said to be uninsurable, and an insurance company will refuse to issue a policy to such
an applicant. For example, an individual with a terminal illness and a life expectancy of 6 months would be uninsurable for term life
insurance. This is because the probability is so high for the individual to die within the term of the insurance, that he/she would pr esent
much too high a liability for the insurance company. A similar, and stereotypical, example would be earthquake insurance in California.
Insurability is sometimes an issue in case law of torts and contracts. It also comes up in issues involving tontines and other insurance
fraud schemes. In real property law and real estate, insurability of title means the realty is marketable..

CHAPTER NO. 2
REVIEW OF
LITERATURE

REVIEW OF LITERATURE AND METHODOLOGY
It is basically concerned with the review of literature done for the present study
and the methodology adopted for the research. Here, in this research study, in order
to analyze the impact of FDI in Insurance sector, the secondarydata is made use
of. After going through the retrospective study of the Insurance sectorin India-
Life and Non Life- we have analyzed the various published and unpublished data
on FDI in India. Various reports of IRDA (Insurance Regulatory and Development
Authority) from the year 2000-01 to 2015-16 have been gone through analytically.
These reports are studied systematically in order to establish their impact on the
Insurance sector of the Indian economy. Information from different newspapers,
magazines and articles has also been gathered and made use of. So, in general,
secondarydata is more in use here. But simultaneously, the views and opinions of
experts have also been considered here.
Review of Literature
A large number of restricted research studies have been conducted onFDI in
general and FDI in insurance sector in particular. Almost all the studies are based
on secondary data. Some scholars have also focused the significance of FDI in
different angles. The review of some important and relevant studies will facilitate
in identifying some of the issues in this area of proposedresearch work.
Many a research studies have been conducted on FDI in general but so far as FDI
in insurance sector is concerned we come across very few studies in this area in
particular. Almost all the studies are based on secondarydata. Some scholars have
also focused the significance of Foreign Direct Investment in different angles. The
review of some important and relevant studies have facilitated in identifying some
of the issues in this area of present research work.
Sahoo and Wadhwa, (1993): in the booktitled "Foreign Investment Law and
Policy in Select Developing Countries" covering twenty developing countries,
contains information on different aspects of foreign investment law and policy
including types of foreign investment, foreign exchange regulations, technology
transfer, investment facilities, authority for approval of foreign Investment and
Approval procedures, areas offering opportunities for foreign investment and
technology transfer, contact points etc.

Ramesh(1994) : in a bookentitled “Foreign Investment Technology Transfer in
Developing Countries” has tried to look at two important issues facing developing
countries. Firstly, how to attract foreign investment and how to benefit from it?
The study suggests that the understanding of motives and determinants of foreign
investment, solving foreign investor‟s problems and keeping the foreign
investment policy clear and open, may help promote foreign investment in
developing countries.
Gakhar(1995): in her research “Motives and Determinants of International
Direct Investment in India” found that factors affecting Foreign Direct Investments
inflow are differ from sectorto sector so specific policies must be required for
specific sectors. She also felt that the need for strong intellectual property rights
and liberal labour exit policy to attract Foreign Direct Investments in R&D. A need
was also felt that more transparency in Foreign Direct Investments policy must be
there for infrastructure development.
Manoj (1997) : in a bookon “Foreign Direct Investments in India: The Issues
Involved” gives some definition of Foreign Direct Investments, a brief overview of
the changing pattern of Foreign Direct Investments ( particularly in the 80s and 90s
), India's foreign investment policy, policy on foreign collaborations followed
during 80s, comparative assessmentof foreign and domestically owned firms
operating in India. Also, the issue of the relative export orientation of foreign and
domestically owned firms is dealt with the main recommendation was that as India
liberalizes its policies to compete with other Asian countries, it must look at the
policies, these countries followed to see what it can and cannot do to encourage
Foreign Direct Investments.
Bajpai and Sachs (2000 ) : in the paper entitled "FDI in India: lssues and
Problems" have examined the aspects and troubles associated with India's current
Foreign Direct Investments system and the other related variables accountable for
India's distastefulness as an investment place. “Despite India offering a large
domestic market, rule of law, low labor costs, and a well working democracy, her
performance in attracting FDl flows has been far from satisfactory. This study
observed that a restrictive Foreign Direct Investments regime, high import tariffs,
exit barriers for firms, stringent labor laws, poorquality infrastructure, centralized
decision-making processes,and a very limited scale of EPZs make India an
unattractive investment location”.

Narayana (2005) : explained that one of the major concerns of planners and
policy makers in India is attracting more and more Foreign Direct Investment. He
analyzed the Foreign Direct Investment and its flows into India. He highlighted the
basic constraints to investment in general and Foreign Direct Investment in
particular.
Singh and Gupta (2009): discussed India foreign capital policy since 1947. They
concluded that the policy framework in India dealing with foreign private
investment has changed from cautious welcome policy during 1948-66 to selective
and restrictive policy during 1967 to 1979. In the decade of eighties, it was the
policy having partial liberalization with many regulations. Liberal investment
climate has been created only since 1991. .
Boopath(2010): revealed that the Press Council of India has commented on
synergic alliance‟ or equity participation by way of Foreign Direct Investment.
The council opined that Foreign Direct Investment should be allowed to break or
halt the growing monopoly of a few media giants in India who offer uneven
playground and unhealthy competition to small and medium papers.
Jampala, Lakshmi and Srinivasa (2011): discussed Foreign Direct Investment
Inflows into India in the Post-reforms period. They concluded that “as far as the
economic interpretation of the model is concerned;the size of domestic market is
positively related to Foreign Direct Investment. The greater the market, the more
customers and more opportunities to invest.

Pradeep(2012): made an attempt to study of foreign direct investment in India.
He emphasized that Investment, or creation of capital, is an important determinant
of economic growth. In general, investment may lead to creation of physical
capital, financial capital and human capital. In combination with other factors of
production and technology, investment determines the levels and growth through
changes in production and consumption of goods and services. Other things being
the same, less investment leads to lower economic growth with attendant
consequences on reduction in income, consumption and employment. Foreign
investment can reduce domestic savings gap. Hence, notwithstanding the domestic
savings gap, economic growth can be increased in an open economy with inflow of
foreign investment. The foreign investment in India would stimulate the domestic
investments. The foreign investments are complementary to economic growth and
development in developing countries like India. Investment in an economy raises
output and improves standard of living of the people. Keeping this end in view
both developed and developing countries are trying their best to undertake
investment programmers. Since the availability of capital is scarcein many
countries due to low rate of domestic savings, hence the importance of foreign
investment is ever rising. Foreign capital consists of private foreign capital and
public foreign capital. Public foreign capital is otherwise financial foreign aid
where as private foreign capital consists of either foreign direct investment or
indirect foreign investment.
In case of foreign direct investment (FDI), the private foreign investor either sets
up a branch or a subsidiary in the recipient country. In the liberalized environment
as economics becomeincreasingly open, and trade between countries expand,
financial transactions become global through financing trade of goods and services.
Capital is the engine of economic development and this statement is gaining
importance in the recent times.

Rao (2015): in a written article on “Insurance: Issues and Challenges" has studied
the Indian insurance sectorin general. Author emphasized that during the last five
years, the Indian insurance industry has undergone dramatic changes. According to
the author, there is enormous scopeand potential for the insurance industry to
provide health insurance in India. The General insurers have to come out with
innovative products in the personal lines if they are to expand business. Some of
the untapped areas include long term health policy, and professional liability
insurance annuities and pensions related products to meet the growing needs of the
ageing population.
This comprehensive study further pointed out the following issues and challenges:
 Due to demographic change in India, companies have to provide products
and services with what is available in advanced countries;
 Matching Asset-Liability;
 Falling interest rates would posea great challenge to the shortfall between
pay – outs and expected returns from investments. The industry has to
develop advanced skills in this area including the use of modeling
techniques;
 To put in place basic infrastructure before de-tariffed regime is affected.
This would include upgrading underwriting skills of the underwriters, using
IT systems, ways and means to protect the policy holders, scientific and
adequate pricing of covers, etc.
 For outsourcing purposes managing relationship with external vendor.
.
This article concluded that, “bestinternational practices in service and operational
efficiency through use of latest technologies, need based selling and professional
advice to the customer through trained sales force and advisors, is bound to make a
significant impact in the Indian insurance industry”.

Justificationof the Study
As it is clear from the review and analysis of past studies that a number of studies
have looked at the trends and impacts of FDI in Indian economy. However, many
of the studies till now have been undertaken to examine the impact of economic
reforms on FDI attractiveness and FDI inflows in India yet there is a dearth of
literature especially dealing with the inflow of FDI in all its manifestations and the
forms in the Indian insurance sector. The present study has made an attempt to
analyse the pattern, potential drivers and implications of FDI in the Indian
insurance sector. Moreover, this study has presented a theoretical model to increase
the equity cap from the present 49 per cent to 60 per cent or above which is the
need of the present market conditions. Therefore, it is in this perspective that the
need of this study is felt.

CHAPTER 3
Scope and Need and
Objectives of the Study

Need for the Study
 It is important to know the different source of capital as well as a source of advanced and
developed technologies that are involved in FDI.
 To know the investors who bring along best global practices of management.
 To study its influence in increasing employment.
 To study how FDI helps in promoting international trade and to understand the reasons how
the host country undergoes development with FDI.
Scope of the study
 The study aims to understand the fundamental analysis and its impact on insurance sector.
 It provides the relevant information about the economy sector.
 Now the FDI investment limit has gone up to 49% from 26% earlier , hence better growth in
terms of investment.
 How the decreasing the unemployment.

Objectives ofthe Study
The present study is designed to accomplish the following objectives in relation to the topic of our
research: .
 To Study the pattern of FDI in Insurance Sector and the Government regulation involved in
them.
 To analyze the arguments for and against the Foreign Direct Investment in India .
 To compare the thoughts and option’s of people working within and outside or both the
insurance company.
 To find out on the account of FDI strength/opportunity and weakness and threats.

CHAPTER 4
RESEARCH METHODOLOGY

Research Methodology
In order to accomplish these objectives, an attempt has been made in the present study to analyze the
growth pattern of FDI in India taking Indian Insurance Sector as the major case study. In this context,
the following methodology has been used in the present research work:
(i) Period of Study
For the purpose of analyzing different determinants and parameters of FDI in insurance sector in
India, data on FDI in insurance sector was taken from March 2017.
(ii) Sources of Information
For the present research work the statistical data was collected mainly from the secondary sources.
Secondary sources include published and unpublished data collected from different organizations,
institutes, agencies and government offices. Reputed journals were also used for collecting relevant
information.
(iii) Statistical Tools and Techniques
In the light of the objectives of our study, different explanatory and analytical statistical techniques
were used to analyze the data relating to our study. For the interpretation of data various statistical
tools were used according to the requirement and suitability of study.

RESEARCH DESIGN
Research design is the arrangement of condition for collection and analysis of data in a manner
that aims to combine relevance to the research purpose with the economy in procedure. It is the
blueprints for collection, measurement and analysis of data.
Type of Research: Descriptive Research
Under the Descriptive research, is a study designed to depict the participants in an accurate way.
More simply put, descriptive research is all about describing people who take part in the study
The methodology followed for research is as following:
1. Afterthe collectionof datathe raw data isprocessedthroughediting,loading, classificationand
tabulationtomake analysisof the data of information
2. To estimatedthe percentage of unitinspecificthe examiningthe certainbehaviour
3. To make the specificpredictions.
Methods of Descriptive research:
1 Observational, defined as a method of viewing and recording the participants
2. Survey, defined as the discussion with an individual about a specific topic.
It involved a sample size of (50) respondents who were interviewed to determine effect of
Plans .

DATA COLLECTION
1. PRIMARY DATA
These include the survey or questionnaire method, telephonic interview as well as the personal
interview methods of data collection
2. SECONDARY DATA
Secondary data was obtained from available sources such as text books, journals, on-line
published articles and internet search engines among others

CHAPTER 5
DATA ANALYSIS AND
INTERPRETATION

 The life insuranceindustry recordeda premium
income of Rs2, 87,072 crore during 2011-12as against
Rs2, 91,639 crore in the previousyear , registering a
negative growth of 1.57 per cent. While private sector
insurers posted 4.52 per cent decline in their
premium income, LIC recorded 0.29 per cent
decline.
 Industry experts believe that most of the challenges
can be addressed through higher capitalization.
 With the increase in stake, foreign players will be
able to contribute in the technical aspects of
insurancebusiness.
 This includes product innovation, claims settlement
process, effective distribution modelsand other
technological best practices.
 Increasein solvency capital will motivate insurers to
ramp up their operations and expand to smaller
cities and towns

The volume of FDI that flows in India in absolute figures emerges as quite interesting and powerful
but when it is compared to global flows, it is regarded as dissatisfactory. This estate is due to the
barricades and deterrents that India is facing at the moment. In light of the present study following
suggestions have been made:
 If Indian government wants to upgrade its insurance sector then it must understand the
importance of FDI in country and should also raise the equity cap so that the role played by
FDI can be enhanced in the insurance sector in the country
 When compared to other developingcountries of the world, the management of FDI in
India is still not very flexible.Still,avery long journey is required to complete in order to
raise the foreign equitycap so that it can range between 51 to 100 per cent.
 This rule of FDI limit upto 49% can be dispensedwith in favour of automatic approval for
100per cent foreign equityownership except for some strategic sectors that may carry on to
need the prior approval of the government.
 Things apart, Indian government is also needed to narrow down the demarcations on the
outflow of FDI by non-financial Indian enterprises so that these undertakings may also enter
into joint ventures, collaborations and FDI arrangements in other foreign countries.
Moreover, vivification of the procedure of FDI in the infrastructure sector is the need of the
hour.
 The research study clearly points out that the determinants of FDI inflowsin India vary
sector-wise and country-wise. Thus, differentsectors have differentpoliciesrelating to FDI.
 FDI policy should be flexible innature so that it may be adjusted immediatelyand
automatically according to the ever changing economic scenario.
 The flexible and transparent policiesare required in differentsectors so that approved
proposals can be translated brisklyinto actual investments.
 FDI policy should be flexible innature so that it may be adjusted immediatelyand
automatically according to the ever changing economic scenario.
 All the reform processes so far have mainly condensed at the central level.Indian state
governments should be set free to a great extent so that they can also contribute much
needed flexibilitytothe reforms.

 In India, state governments should be lookedupon as potential agents of quick, rapid and
noticeable change. State and regional governments are taking initiativesin introducing and
implementingreforms in various countries like Brazil, China and Russia.
 In order to enabler the firms to enter and exitfreely from the market, an exitpolicy needs
to be formulated. No doubt, the economic reforms which are practically implementedtill
now have helpeda lot in the removal of the entry barriers, but the liberalization of exit
barriers is yet to be done. These restrictions on exitbarriers come up as a significant
deterrent to a large volume of FDI inflowsin India.
 Financial sector reforms in India are most crucial and significant determinant for large
volume of FDI inflows.

• This is a very capital intensive industry. Already about
Rs33,000 crore has been invested as capital and a further
Rs50,000-60,000 crore is required before companies
actually breakeven and start making profits.
• 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)

1. Aggarwal, S.; Singhla, A. & Aggarwal, R., “Foreign Direct Investment in
India”, International Journal of Computational Engineering & Management,
pp. 93-105, (2012).
2. Chaturvedi, I., “Role of FDI in Economic Development of India: Sectoral
Analysis”, International Conference on Technology and Business
Management, (2011).
3. Chaudhary, P., “Insurance Sector in India: A Case Analysis”, International
Journal of Research in IT & Management, Vol. 4, Issue 2, pp. 35-44, (2014).
4. Fact Sheet, “Foreign Direct Investment (FDI) for the period April 2000 to
2014”, Department of Industrial Policy and Promotion, Ministry of
Commerce,(2014) available at:
http://dipp.nic.in/English/Publications/FDI_Statistics/2014/india_FDI_Marc
h2014.pdf
5. Gopalakrishnan, S., “India Must Attract more FDI”,The Times of India,
Delhi, (2013, August 12)
6. IMF, Business of Payments Manual, Fifth Edition (BPM5), Washington,
(1993).
7. IRDA, Annual Report 2012-13, available at:
www.policyholder.gov.in/uploads/CEDocuments
8. Khan, A., “FDI Hike in Insurance Harmful”,People’s Democracy, (1993).
9. Malhotra, B., “Foreign Direct Investment: Impact on Indian Economy”,
Global Journal of Business Management and Information Technology, Vol.
4, No.1, pp. 17-23, (2014).

10.ND Shiva Kumar, "Unemployment rate increases in India", The Times of
India, (2013, June 23)
Web Links
1. http://www.tradingeconomics.com/india/current-account-to-gdp
2. http://www.economicshelp.org/blog/9712/development/indian-economy-
2014/
3. http://www.livemint.com/Politics/PCAb2ws66itgsQbG6rF7NP/Modi-said-
to-give-Raghuram-Rajan-veto-power-to-meet-Indias.html

Questionnaire
1. Do you think the FDI is required in insurance ?
 Yes
 No
2. Do you think the FDI is friendly for insurance company ?
 Yes
 No
3. Is 49% FDI sufficient in insurance sector ?
 Yes
 No
4. Has entry of the FDI in insurance sector helping to improving the
qualities of services in the insurance sector?
 Yes
 No
5. The rising of the FDI limit in insurance sector helped to
improving the quality of service in insurance sector ?
 Yes
 No

6. Do you agree with the govt.to reforms be made to support
domestic insurance company so that they can be face the
competitors with the foreign insurance company?
 Yes
 No
7. Do you agree with the govt. reforms be made to support
domestic insurance companies ,so that they can face with the
competition with the foreign companies ?
 Yes
 No
8. Do you think that the Indian govt. should open the FDI
restriction in insurance company ?
 Yes
 No
9. Is heigher FDI limit insurance a threat for public sector insurers?
 Yes
 No

10. According to you what should be the percentage of FDI
allowed in the insurance sectors ?
 0-25%
 26-50%
 51-75%
 75+%
11. How long the FDI in insurance sector is required ?
 1-5
 6-10
 11-15
 16-20
 20+

Final

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