Should the FDI limit on insurance be raised?

he government’s proposal in its present form lacks safeguards and cannot be allowed, but foreign capital is necessary to unleash a second wave of insurance distribution to people who are still left out.

Prakash Javadekar
BJP spokesperson & Member of the Public Accounts Committee

‘If we allow Foreign Direct Investment in the insurance sector, will it guarantee that foreign companies will go to rural areas or in smaller cities?’

The Bharatiya Janata Party (BJP) leadership has not yet formulated a final position on the insurance Bill because we feel that there is need for a greater debate on the issue. The senior leaders of the BJP will meet at the end of July to formulate their views on the Bill just before the start of the monsoon session of Parliament because we expect the government to take up this issue in that session. We should not forget that it was the BJP that had brought 26 per cent foreign direct investment (FDI) in the insurance sector so it would be wrong to say we are against further opening up of the insurance sector. We are only demanding that since the standing committee on finance has raised certain issues, we would like those issues to be discussed further with different political parties.

The government’s proposal lacks safeguards and it cannot be allowed in the present form. The standing committee on finance, which is examining the insurance Bill, has raised several valid concerns. The Union government should allow collective wisdom of parliamentarians and hold proper discussions. The standing committee is a parliamentary committee and it is bipartisan. Therefore, we need to look at the issue not from a political point of view but we have to rise above political lines to discuss the issue because, ultimately, it is the money of the people that we are talking about and we would not want the people to suffer.

When we talk about allowing more FDI in the insurance sector, we must keep in mind our experience after the 2008 slowdown that affected every country, including India. Raising the FDI limit from 26 to 49 per cent in the insurance sector is a substantial increase. These are foreign companies we are talking about and we don’t want them to start reducing their investment if there is a financial slowdown again. There are several areas where 100 per cent FDI is allowed but then capital investment is not coming. The percentage of FDI that is already coming in is declining steadily and these issues have been raised by the BJP in Parliament also. We need to put in several riders before allowing 49 per cent FDI in insurance sector because investors might lose their money.

The health sector in India is already worrisome and if we allow FDI in the insurance sector, will it guarantee that foreign companies will go to rural areas or in smaller cities? There is no target given to them that they have to go to rural areas. These companies would compete with LIC and General Insurance Corporation. There are issues related to claimed settlement and the performance of foreign companies is dismal compared with General Insurance. People sometimes don’t get their claimed settlement. If the government wants to improve access to better medical care in rural areas and small towns then it has to come up with long-term plans for the people so that people get timely and affordable healthcare.

There is talk of increasing FDI in sectors like defence and retail. While talking about these sectors we mustn’t forget FDI in every sector is different and has different concerns. For instance, security concerns have to be addressed before allowing FDI in the defence sector, there would be foreign companies who would get access in our defence sector so the government will have to decide how it wants to deal with such a situation. We are importing 100 per cent in the defence sector, so we have to see if we want to increase FDI in defence or not.

Similarly, there are several concerns in allowing FDI in the education sector. The foreign university Bill has been pending for a very long time and if the Bill is passed in Parliament then foreign universities would be able to open campuses in India. But is there any guarantee that all good universities would want to come to India? What will the government do if some of the less reputed universities come instead?

Amitabh Chaudhry
MD & CEO, HDFC Life

‘Foreign capital would come with deeper expertise in products, better underwriting skills and superior technology transfer to India’

Any discussion on increasing Foreign Direct Investment (FDI) in India is contentious and prone to rhetoric. More so in a sector like insurance, which is the only industry that provides solutions for long-term savings in India, is also expected to provide stability to the financial markets and to provide a buffer against external shocks. Wouldn’t we be exposing our fledgling economy to unwarranted risks by increasing foreign participation in the insurance sector? It’s a common question I get asked. Like everything in life, there are advantages to a certain course of action, there are risks and there’s a way to make an informed decision. The only course that has no risk is inaction. And, as I would like to argue, we can’t afford inaction.

The case for an increase in the FDI cap in the Indian insurance sector from the current 26 per cent to 49 per cent is compelling. Let’s first appreciate what the opening up of the insurance sector since 2000 has done for the economy. In the life insurance industry, the last decade has seen a tenfold increase in the number of lives insured, a six-time increase in the number of branches and over ten million lives insured in the rural sector. These achievements were unthinkable when the journey started. LIC, the public sector monopoly, took the competition head on with competitive products and improved customer service and has taught all of us private players a trick or two in the process. It’s a fine example of what liberalisation can achieve — increase market penetration, promote competition, deliver better service and ensure that a monopoly player raises its game and, in the process, helps the industry and its consumers. These have been achieved in a well regulated environment driven by the Insurance Regulatory & Development Authority . This has ensured that the sector has not been exposed to systemic risks. But there’s only a small hitch. Most of the private players as we speak have accumulated losses. This is not on account of only inefficiencies in the sector. Insurance is a long-term business and the break-even takes a decade or so. So, far from the bogey of “plundering India’s wealth” private promoters (Indian and foreign) have infused a huge amount of capital (almost Rs 30,000 crore) to build this sector.

And, despite all this, we are still a hugely underinsured country. Insurance is a vital service in a growing economy that helps calibrated risk-taking by individuals and enterprises. But we still have huge swathes of uninsured or underinsured across the country. It takes capital to reach them, educate them and design innovate products and services that will cover them from exigencies. This capital isn’t easy to generate anymore from domestic sources, especially when you consider the accumulated losses that the industry has made. We need foreign capital and we need long-term capital to unleash a second wave of insurance distribution to the social sectors that really need them. Foreign capital would also come with deeper expertise in products, better underwriting skills and superior technology transfer to India. Also, from a short-term perspective, at a time when there is a net outflow of capital, a move like this will help reverse the flow and improve sentiments. Also let’s not forget that our government made an implicit commitment to open up the sector to increased foreign participation. Our inability to do so does not reflect well on the country.

We should balance these benefits with the potential risks to which we might be subjecting ourselves on account of increase in FDI cap. The regulator has been working hard to ensure the interest of the policyholders and the systemic risk in the insurance sector is managed well. I see the regulator, the government and the players fully capable of drawing up a framework to manage them. Barring ideological obstructions, I think we can manage the risks and draw the advantages that an increase in cap can bring to the people of this country. I see more risks in not increasing the cap than in increasing it.