FDI and Insurance

To understand what FDI in insurance means, one must know what FDI actually means, what happens when a country’s sector accepts investments from another country.

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

What is the state of India’s Insurance Industry?
The Indian insurance industry seems to be in a state of flux.
After a decade of strong growth, the Indian insurance industry is currently facing severe headwinds owing to reasons like:

  • Slowing Growth
  • Rising Costs
  • Reforms being stalled
  • Worsening distribution structure

To understand this better, let us have a look into IRDA’s (Insurance Regulatory and Development Authority) report on Indian Insurance Industry landscape for the 10 year period between 2010 and 2010.

What are the ultimate benefits of increased FDI in Insurance sector?

  1. Insurance products: Private as well as government insurers will benefit from the proposed hike of FDI; these companies will offer better and wide range of insurance products to customers at larger competitive prices.
  2. Smaller Companies: FDI will help smaller insurance companies to break-even faster and help monetize (convert into currency) the holdings of the promoters of the older life insurance companies.
  3. Capital inflow: Immediate capital inflows of $2 billion and long term inflows of about $10 billion can be expected.
  4. Aggression: The industry has been cautious in selling products which are capital intensive, it will be able to become more aggressive.
  5. Technology: Insurers will not just get capital but also technology and product expertise of the foreign partner who is the domain expert.
  6. New Players: We can expect about 100 life and non-life insurance companies to serve a market of our size. Increasing FDI could see 25-30 new insurers entering the market.
  7. State-Run Companies: People in the country have more faith on government insurance companies and less on private ones, this hike will benefit the state-run companies more than the private ones. 
  8. Penetration: With the population of more than 100 crores, India requires Insurance more than any other nation. However, the insurance penetration in the country is only around 3 percent of our gross domestic product.  Increased FDI limit will strengthen the existing companies and will also allow the new players to come in, thereby enabling more people to buy life cover.
  9. Employment: With more money coming in, the insurance companies will be able to create more jobs to meet their targets of venturing into under insured markets through improved infrastructure, better operations and more manpower. 
  10. Level Playing Field – With the increase in foreign direct investment to 49 percent, the insurance companies will get the level playing field. So far the state owned Life Corporation of India controls around 70 percent of the life insurance market.
  11. Increased Capital Inflow – Most of the private sector insurance companies have been making considerable losses. The increased FDI limit has brought some much needed relief to these firms as the inflow of more than 10,000 crore is expected in the near term.This could go up to 40,000 crore in the medium to long term, depending on how things pan out.
  12. Favorable to the Pension Sector –If the pension bill is passed in the parliament then the foreign direct investment in the pension funds will also be raised to 49 percent. This is because the Pension Fund Regulatory Development Bill links the FDI limit in the pension sector to the insurance sector.
  13. Consumer Friendly – The end beneficiary of this amendment will be common men. With more players in this sector, there is bound to be stringent competition leading to competitive quotes, improved services and better claim settlement ratio.

Types of Frauds in Insurance Sector
There are many but following are Main.

Premium Diversion

  • Premium diversion is the embezzlement of insurance premiums.
  • It is the most common type of insurance fraud.
  • Generally, an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use.
  • Another common premium diversion scheme involves selling insurance without a license, collecting premiums and then not paying claims.

Fee Churning

  • In fee churning, a series of intermediaries take commissions through reinsurance agreements.
  • The initial premium is reduced by repeated commissions until there is no longer money to pay claims.
  • The company left to pay the claims is often a business the conspirators have set up to fail.
  • When viewed alone, each transaction appears to be legitimate—only after the cumulative effect is considered does fraud emerge.

Asset Diversion

  • Asset diversion is the theft of insurance company assets.
  • It occurs almost exclusively in the context of an acquisition or merger of an existing insurance company.
  • Asset diversion often involves acquiring control of an insurance company with borrowed funds. After making the purchase, the subject uses the assets of the acquired company to pay off the debt. The remaining assets can then be diverted to the subject

Thanks Padhaku!!!