Insurance industry welcomes Finance Ministry’s reform proposals, including raising FDI limit to 100%, seeking stakeholder feedback for amendments.
The domestic insurance industry has hailed the Finance Ministry ‘s latest reformist proposals on amendments to the Insurance Act 1938 like increasing the foreign direct investment (FDI) limit to 100 per cent from the current 74 per cent.
Currently, in the insurance sector, Parliament nod is necessary for any hike in FDI limit in view of the specific provision in law specifying the limit.
Proposed amendments
The Department of Financial Services (DFS) has now sought stakeholders’ comments by December 10 on slew of proposed amendments to the insurance law including FDI limit hike to 100 percent and the provision of composite licences in industry, lowering the entry bar ( minimum paid up capital threshold) and reducing the net-owned funds for Foreign Reinsurance Branches and Lloyds members from ₹5000 crore to ₹1000 crore (The previous draft of the bill had proposed ₹500 crore). Also, on the anvil are an open architecture for insurance agents that will allow them to tie up with more than one life, general and health insurance player. Currently, the insurance agents are allowed to tie-up with only one life, general and health insurance company.
Reacting to the Finance Ministry’s move to seek comments on the proposed amendments, Kamlesh Rao, MD and CEO, Aditya Birla Sun Life Insurance, said that allowing 100 per cent FDI in the insurance sector is a forward-looking move that could attract global players by addressing concerns over ownership and management control.
This change has the potential to bring in significant capital, global expertise and innovative practices, vital for a capital-intensive industry like insurance, he added.
New opportunities
“While this policy could unlock opportunities for foreign insurers to expand in India, the role of domestic partners remains indispensable. Indian conglomerates provide unmatched local insights, robust distribution networks and consumer trust, which are critical for scaling operations in a diverse market”, Rao said.
“A balanced approach leveraging global capabilities and domestic strengths will ensure the sector’s growth is inclusive and sustainable, paving the way for a well-insured India”, he added.
Shailaja Lall, Partner, Shardul Amarchand Mangaldas and Co, said that the proposed changes to the Insurance Act 1938, are not old wine in a new bottle. There seems to be several new additions and a few deletions which are notable from the last draft of the Insurance Laws Amendment Bill circulated by the Department of Financial Services in 2022, where significant reforms were proposed, Lall added.
New proposals
Some of the new proposals are increase in the FDI limit to 100 per cent, recognition of managing general agents (MGAs) as insurance intermediaries, insertion of a definition for insurance business and premium, additional functions which an insurer can undertake other than insurance business such as indemnity and guarantee business, managing and selling properties which come into the Insurer’s possession in satisfaction of claims and removal of the limit for tying up with one insurance company in the same class for insurance agents.
The IRDAI may now also propose reduced entry capital of minimum ₹ 50 crores for insurers serving underserved segments or special lines of business.
The proposal is also to expressly recognise online payment of premium under Section 64VB of the Act, further clarifying that in those cases, risk is to be assumed only upon receipt of money in insurer’s bank account, Lall added.
“A significant change is a proposal to permit a scheme of arrangement between an insurer and a company not engaged in insurance business in accordance with conditions specified by the IRDAI.
This will settle the dust on the ongoing debate on the issue of merger of an insurer with a company not engaged in insurance business, pursuant to section 35 of the Insurance Act”, she added.
Further, more checks and balances are proposed by introducing a requirement on the IRDAI to consult with the central government and the insurance advisory committee before framing and notifying regulations under Insurance Act.
Certain reforms which were proposed previously such as allowing captive insurers, the proposal to permit insurers to distribute other financial products have been dropped from the current draft, Lall noted.
The other notable provisions which have continued from the previous draft are the proposal to introduce Composite licenses, perpetual registration for insurance intermediaries, reduction of the net owned funds for Foreign Reinsurance Branches and Lloyds members and increase in penalties for various offences and increase in the minimum threshold for seeking prior IRDAI approval for share transfers to 5 per cent of the nominal paid up capital of the insurer.
