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Foreign Direct Investment (FDI) is a direct investment made to a business by an entity based in a different country. The investment gives the entity a form of control in the ownership. FDI aids in the growth and expansion of domestic industries extensively. The amendment of the FDI in the insurance sector is expected to give it a substantial acceleration.
However, there are downsides to foreign investment that everyone should also take into consideration.
This article will explore the FDI limit in the insurance sector, its impact, and its downsides in detail.
The impact of Foreign Direct Investment plays a vital role in an economy and has a mix of advantages and disadvantages.
The first paperless union budget in 2021 has undoubtedly developed a buzz of questioning for the entire insurance sector. The suggested changes in insurance FDI are assured to affect insurance companies, policyholders, and everyone planning to get a new policy.
In India, most of the insurance companies are private. These companies undergoing considerable losses are a common aspect, especially with the lack of availability of funds. Due to the unexpected payouts of many insurance policies, high outflows are natural.
Foreign investment aids such companies and brings relief to them with a substantial amount of inflow of cash. It helps the companies to remain functional and offer competitive premiums to the public.
South Africa, the United States, and South Korea have some of the highest insurance penetration of 13.4, 11.43, and 10.78%. Compared to these countries, India, even with a higher population, falls much short. As against the world average of 6.31%, India’s insurance penetration is only a mere 3.7% of the Gross Domestic Product.
With a 17.7% population of the world amounting to 1.38 crores, most people don’t get covered under any insurance policy. India’s need for increased insurance penetration is vital. Foreign Direct Investment helps strengthen existing companies to fortify the insurance sector and help newcomers break into the market.
Despite having more offices and branches, private insurance companies have fewer underwritten premium amounts than state-owned agencies. The reason for this could be the government backing and the number of years in the industry state-owned insurers has.
A revised FDI limit in the insurance sector will support the private agencies to compete with the dominant state-owned companies and bring fair-play. Along with the private agencies, the public also gains from insurance FDI with a broader choice of policies that gives more desirable incentives.
In the international money market, foreign investments lead to an increase in the demand for the invested nation’s currency. With the increased demand, there is an anticipation of a positive influence on the exchange rate.
FDI helps to maintain forex reserves and, at the same time, leads to lowering the cost of imports. Also, an increase in FDI in the insurance sector in 2021 means there will be capital inflow to the overall Indian economy. The economy further benefits from the increased trust of foreign investors in the Indian market.
The backing from foreign investors supports the newcomer agencies and the existing agencies to have healthy functioning. It leads to a rise in the number of insurance policyholders. For the increased customers, developed core, and intensified operations, an additional workforce requirement is natural.
With more agencies operating in the market, the contest for acquiring more customers also keeps increasing. The competition between the agencies makes them focus more on the customer’s interests. The consumers gain the most out of this rivalry and receive better value and incentives for their money.
The investment from abroad also facilitates the development of actuaries. Along with the growth of the insurance market, the actuary work grows. The insurance agencies and the general public both benefit from the actuary work through the analysis. Insurance FDI allows the agencies to hire and train actuaries, which can otherwise not be very affordable.
The cap for FDI in the insurance sector 2020 was limited to 49%. Before the last mark-up in 2015, the insurance sector FDI limit was only up to 26%. Since the previous hike, the industry has witnessed a positive reaction.
Since the union budget 2019-20, the finance ministry and PM Narendra Modi government have been considering a 74 % to 100 % FDI in the insurance sector in 2019. This consideration has become a reality in this year’s union budget.
The finance minister Nirmala Santharam proposed another hike in the insurance sector’s Foreign Direct Investment at the union budget 2021.
Insurance penetration in India is substantially lower than the global average. This calls for expansion and improvement in the Indian insurance sector. This is where Foreign Direct Investment can help. FDI in the insurance sector backs up the agencies with funding and expertise, assisting them in taking the proper steps. Over the years, the FDI limit in the insurance sector has witnessed increments that have benefited the industry majorly.