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In a bid to give boost to the slowing insurance industry, Finance Minister Nirmala Sitharaman announced the opening up of the sector to 100 per cent foreign direct investment (FDI), up from the previous limit of 74 per cent.
In her eighth Budget speech on Saturday, Sitharaman said, "This enhanced limit will be available for those companies that invest the entire premium in India. The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified."
Insurance penetration in India has experienced modest growth over the past decades. A November 2024 report by McKinsey & Company described the growth story of India’s insurance industry as "glass half empty," citing gap in product innovation, distribution efficiency, and renewal management among other reasons.
Declining insurance penetration
Insurance penetration and density are two metrics, among others, often used to assess the level of development of the insurance sector in a country. While insurance penetration is measured as the percentage of insurance premium to GDP, insurance density is calculated as the ratio of premium to population (per capita premium).
In India, insurance penetration has risen from 2.7 per cent to 3.7 per cent, whereas insurance density has grown from $11.5 to $95 between 2001 to 2024. As against this, the global average for insurance penetration and density stands at 7 per cent and $889, respectively, in 2024.
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However, the insurance penetration in India hasn't seen a remarkable growth despite its upside potential. In 2001, the penetration rate was 2.71 per cent, which increased to 3.76 per cent in 2019. When compared to other emerging economies in Asia during 2019, India's insurance penetration was lower, with Malaysia at 4.72 per cent, Thailand at 4.99 per cent, and China at 4.30 per cent.
Insurance penetration in India
The numbers saw a jump in the next two years due to Covid-19 pandemic, but saw a decline in the 2022-23 and 2023-24 period. In the financial year 2022-23, the overall insurance penetration stood at 4.0 per cent, a slight decrease from 4.2 per cent in 2021-22. The numbers further dipped to 3.7 per cent in 2023-24, indicating that despite the industry's efforts, insurance coverage relative to the economy's size has not seen significant improvement.
While insurance density has seen gradual growth over the years, it remains significantly lower than the global average. In the financial year 2023, India's insurance density reached $95, while the global average stood at $889. This disparity highlights the considerable potential for growth in India's insurance market.
The relatively low insurance penetration in India can be attributed to factors such as limited awareness about insurance products, economic constraints, and cultural preferences favouring traditional financial practices.
How will 100% FDI impact the insurance sector?
Since the introduction of foreign direct investment (FDI) in 2000, India’s insurance sector has attracted Rs 82,847 crore in investments as of September 2024. This has played a crucial role in driving growth, streamlining operations, and expanding customer outreach.
Additionally, insurance broking firms have received Rs 5,688 crore as of September 2023. As of March 31, 2024, a total of 41 insurance companies have foreign investments.
The government seeks to fully unlock the potential of India’s insurance industry, which is projected to grow at an annual rate of 7.1 per cent over the next five years, surpassing both global and emerging market growth trends. Eliminating the existing FDI cap is anticipated to encourage steady foreign investment, enhance competition, facilitate technological advancements, and improve insurance penetration nationwide.
A 100 per cent FDI allowance would ensure long-term capital availability, enabling insurers to adopt emerging technologies, strengthen distribution networks, and enhance market competitiveness. This move is also expected to attract global insurance firms, generate employment, and simplify foreign investment by removing the requirement for overseas investors to collaborate with Indian partners for the remaining 26 per cent.
Many countries, including Canada, Brazil, Australia, and China, allow 100 per cent FDI in insurance. Aligning India’s investment policies with global standards would enhance its appeal as a destination for foreign insurers.
How will this benefit customers?
Greater foreign investment is expected to introduce more players into the market, intensifying competition. This, in turn, is likely to lead to better product offerings, enhanced customer service, and competitive pricing, ultimately improving insurance penetration and narrowing the protection gap.
Despite increased foreign participation, regulatory oversight by the Insurance Regulatory and Development Authority of India (IRDAI) and Government policies will ensure that the industry operates in the best interest of policyholders. Rather than allowing foreign dominance, higher FDI inflows will support domestic initiatives and contribute to inclusive sectoral growth.
IRDAI will continue to enforce transparency, accountability, and compliance with Indian regulations, maintaining a balance between industry growth and consumer protection.
Revisions in FDI regulations
Foreign investors have consistently advocated for ease of doing business in the capital-intensive insurance sector, highlighting the challenges of securing reliable domestic partners. In response, the government is considering revisions to FDI regulations, including provisions related to key management appointments and board composition, to create a more conducive environment for foreign investments and sectoral expansion.
