Unlocking Global Synergies For Indian Insurance Sector

The Indian insurance sector is poised for its next great leap. The journey towards liberalization began in 2000 and saw a significant turning point with the Insurance Laws (Amendment) Act, 2015, when the foreign direct investment (FDI) in insurers was permitted up to 49%.

However, the latest draft amendments to the Indian Insurance Companies (Foreign Investment) Rules, 2015 signify a fundamental shift towards complete market openness. This proposed move, which permits 100% FDI in insurers, is much more than a quantitative increase in sectoral caps. It is a liberalization policy designed to unlock the sector’s full potential. Low insurance penetration, limited product diversification, and distribution inefficiencies that have long plagued the industry. The government’s intent to address these challenges is now front and centre.

The Indian Insurance Companies (Foreign Investment) Rules, 2015 prescribe conditions for FDI in insurance companies and intermediaries. These include limitations on governance, repatriation of dividend and related-party transactions. Notably, insurers with any amount of FDI are required to have a majority of their directors and key managerial persons as resident Indian citizens and at least one among its chairperson or managing director or CEO, as a resident Indian citizen. Where that FDI exceeds 49%, the insurance company is additionally required to have at least half of its directors as independent directors. This requirement of independent directors is reduced to one-third, if the chairperson of the Board is an independent director. Further, for such insurers, in a financial year where dividend on equity shares is paid, the insurer is required to retain at least 50% of its net profit in general reserves if its solvency margin is less than 1.8x.

The amendments to the rules of 2015 propose eliminating all conditions associated with FDI in insurance companies, except for the requirement that the chairperson or MD/ CEO of the insurer must be a resident Indian citizen. This change will provide greater flexibility in the composition of the board and management team, allowing the insurance companies to appoint talent from a global pool, regardless of their residency status. However, the requirement for insurance companies with foreign investment to have at least one key leadership role (i.e. the chairperson, MD or CEO) being held by a resident Indian citizen, has been retained to ensure a level of local control and oversight in terms of compliance with Indian laws and regulations 

The regulatory framework for insurance intermediaries with majority foreign investment is also sought to be liberalised. Specifically, the conditions requiring the appointment of a resident Indian citizen as chairperson, or Principal Officer or MD, prior permission from IRDAI for repatriation of dividend and restriction on payments to foreign group entities, promoter, subsidiary or interconnected entities beyond what is permitted by IRDAI, are proposed to be removed. The draft’s omission of resident Indian mandates and dividend curbs could unleash a wave of global brokerage firms entering India, fostering competition that drives down intermediation costs. Brokers often bridge insurers and clients; with liberalized payments to foreign entities, they could integrate seamlessly with global networks, offering bespoke products like cross-border trade credit insurance amid India’s FTA push. Further, easing repatriation of dividend aligns with WTO commitments under GATS, minimizing disputes at tribunals.   

To ensure a cohesive, updated and aligned regulatory framework for the insurance sector, once the proposed amendments to the Indian Insurance Companies (Foreign Investment) Rules, 2015 come into effect, the next crucial step to give full effect to the proposed FDI liberalization would be to amend the Insurance Act and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. However, to give full effect to the proposed amendments to these rules for insurance intermediaries, consequential amendments will have to be made to the insurance intermediaries’ regulatory framework, including amending certain undertakings which IRDAI mandated such intermediaries to furnish.

The legislative history, especially the Insurance Laws (Amendment) Act, 2015, which raised the FDI cap to 49% was a foundational piece of legislation although a calibrated approach was sought to be adopted to inviting foreign capital while retaining “Indian ownership and control”. The subsequent increase to 74% in 2021 was a further step in this direction, providing foreign investors with greater engagement and control. Now, the time for a truly liberalised insurance regulatory regime has finally arrived.

Indranath Bishnu is the Head of Insurance Practice at Cyril Amarchand Mangaldas.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.