In a move to bolster the insurance sector, Finance Minister Nirmala Sitharaman announced a significant increase in the Foreign Direct Investment (FDI) limit, raising it to 100 percent.
This change, made during the Union Budget 2025, is expected to open doors for greater foreign participation and investment in the sector, according to the government.
The amendment to FDI includes a condition that the premium paid for the acquisition of shares should remain within the country. This means that any premium paid for shares during the investment process must be retained within India, ensuring that the funds are not diverted to foreign markets.
However, industry experts have mixed opinions on whether this will lead to a substantial increase in insurance penetration, which remains low at just 3.7 percent in India, with life insurance penetration particularly low at less than 2 percent, despite several previous reforms to improve this metric.
"Though the FDI limit was raised to 74 percent earlier, the penetration has still been low," said Nilesh Sathe, former member of the Insurance Regulatory and Development Authority of India (IRDAI).
He said that while the new policy could bring in more foreign players, it may not directly impact penetration levels, which continue to be a challenge due to factors such as low awareness, trust issues which insurers face with customers, and policy complexities.
However, Sathe highlighted, the low penetration coupled with rise in the FDI limit could allow more insurance companies to said the Indian market and invest in existing insurance firms.
"There is more scope for foreign companies to start investing in India because they do not have to tie up with a partner anymore," he said. In other words, since the door opens for insurance companies to independently operate in the country without having to madatorily join hands with an Indian entity, the FDI amendments may pave way for more capital to flow into the sector.
"This move will attract global capital and help expand insurance coverage in India where penetration remains below 5%," said Anand Roy, MD & CEO, Star Health & Allied Insurance Co. Ltd.
Balamurugan Shanmugam, Chief Investment Officer at Aviva India, pointed out that the government has reinforced the requirement for global insurers to invest all premiums collected within India, addressing concerns about capital flight.
"This measure is crucial to ensure that the benefits of increased foreign investment remain within the Indian economy," he said.
However, Shanmugam pointed out that it is natural for such massive policy changes take time to fully reflect in the system, as the 100 percent is a far greater step than the optics of a 26 percentage point increase, which was made earlier.
Currently, Aviva plc holds a 74 percent stake in Aviva Life Insurance Company India Limited and Future Generali are the two insurance companies where the foreign partner has invested fully up to the maximum permissible limit as per the FDI cap that existed till date.
Niva Bupa, meanwhile, is majority-owned by True North, holding a 63 percent stake. Recently, Zurich Insurance acquired a 70 percent stake in Kotak Mahindra General Insurance.
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