Ministry of Finance raising FDI limit to 74 percent has had little impact on small and private insurance players.
Small-scale insurance companies have been lagging in reaping the benefits of Foreign Direct Investments (FDI) in the insurance sector, despite FDI limit being raised to 74 percent from 49 percent in 2021. This, small players insist, has only benefitted large-scale companies.
Small and private companies say that foreign investors or insurance companies do not find thema viable investing option. Foreign companies tend to invest in big plates like Life Insurance Company (LIC), General Insurance Companies (GIC), and others.
Sudheer, Manager at Apna Insurance Broking Consultant, Bengaluru said that for the last five years the company is operating at break-even point. “It is impossible to compete with big players like LIC. These big public sector companies have a direct advantage over small companies in getting capital through FDI. “Small companies like us are not an attractive option for foreign companies to invest in.” He said that in 2022,because of pent-up demand for health insurance caused by the COVID-19, they had approached many foreign insurance companies. “But these companies cancelled ventures each time because of more suitable options like LIC,” He added.
LIC has the capacity to generate additional capital. LIC is the only domestic public company for life insurance,”said Sudheer. He added thatit gets full support from the government and that they get investments easily unlike them.
Sudheer added that insurance is a long gestation period business and requires largecapital. The government does not provide much support to the small and private insurance companies and, foreign companies doubt the solvency and goodwill of small and private companies. They compare it with big players. Big players have large customer base, policy support and greater capital. “We cannot survive in such a monopolistic competition. When the government allowed 74 percent FDI in the insurance sector, I thought it was a great step to generate capital for small players.”
He added that foreign investors want to acquire a profitable company thathas a strong foothold in the market and that they do not want to invest in small playersThe Ministry of Finance amended the Indian Insurance Companies (Foreign Investment) Rules, 2015 by increasing the permissible limit of FDI from 49 percent to 74 percent in the insurance sector. It was allowed to increase the inclusion of global practices in terms of insurance products. It will also help in bringing down the cost of insurance products in India.The insurance penetration in India is just 3.7 percent of the Gross Domestic Product (GDP) against the global average of 6.31 percent. There are only 24 life insurers and 34 non life insurers in India. Whereas, in 1973, during nationalisation there were 243 life insurance companies and 107 non life insurance companies. Out of existing players in life insurance, LIC is the sole public sector company.
According to the Department of Industrial Policy and Promotion (DIPP), the total FDI investments received during April-September 2016 rose 30 percent year on year to US $21.6 billion in 2022. The Ministry of Finance, in the press release, said that it will benefit small insurance players and where the sponsors do not have the ability to put in more capital and it will increase competition across the industry. It will help local private players to grow fast.
However, private players are the ones who are at a loss. Manager, at the Bangalore insurance company said, “Without any government support we cannot thrive in the market. We need capital, and no foreign insurance companies are willing to invest in us. How will we do our business withsuch cut throat competition?”
Divya Mishra Professor of Macro Economics, Sophia Girls college, Ajmer, said that big players like LIC, GIC and others have a strong footing in the market. “Their economies of scale are huge. These players are present across every city of India, and due to this they will benefit more from FDIs compared to the small players. It will negatively impact the economies of scale of small insurance players.” She added that for now, small players have competition from these two big players but with the FDI, they will have to compete with the foreign entities as well. However, if foreign entities and the government come up with some innovative solutions along with FDI, then it can help small and private players to boost their operations and economies of scale.
