Limited appetite raises questions on insurance FDI growth projections

Amid reports that a Bill to raise the foreign investment cap in the insurance sector to 100 per cent could be introdued in Parliament either in this session or the next, government data reveals that companies have utilised only 32.67 per cent of the current 74 per cent foreign direct investment (FDI) limit, indicating limited demand for such capital. 

 

Data as of March 31, 2024, shows that of the total paid-up capital of Rs 96,016.54 crore in the sector, only Rs 31,365.57 crore was FDI. If the government-owned LIC and the four general insurers were excluded, the share would rise slightly to 36.56 per cent. Many commentators argue that higher FDI will provide the necessary capital for insurance companies to expand, but the data does not support this assumption.

 

Meanwhile finance ministry mandarins do not expect the Insurance Bill, which among other reforms, proposes to increase the FDI cap to 100 per cent, to be introduced in this session. It has not been listed for next week. The winter session of Parliament ends on December 20th.  

 

The pace of FDI utilisation has been slow. Among private-sector non-life insurers, no company has reached the current 74 per cent threshold. In life insurance, only three — Ageas Federal, Aviva Life, and Future Generali — have hit the ceiling, while others remain far below the limit.

 

The insurance business is highly capital-intensive. For every rupee of capital raised, companies must set aside funds for potential claims, in addition to provisioning, from premiums. This is critical in segments such as health insurance, where claim ratios often exceed 90 per cent. To scale operations, companies must consistently raise capital.

 

The sector regulator, the Insurance Regulatory and Development Authority of India (Irdai), is urging both life and non-life insurers to expand coverage to all Indians. As a result, the scope for FDI has started growing. Over the past five years, FDI in the sector has increased at a compound annual growth rate (CAGR) of 7.5 per cent, much faster than in previous decades.

 

But despite the growth, the share of FDI has reached only 32.67. The sector was allowed up to 26 per cent FDI in the year 2000. The limit was increased to 49 per cent in 2015 and to 74 per cent soon afterwards in 2021. The combined growth in premiums for the sector was 7.72 per cent in FY24. Since FY20 the CAGR of the sector has been 8 per cent.