Based on the recommendations of the Select Committee on the Insurance Laws (Amendment) Bill, 2008, the Union Cabinet has approved the amendments in the insurance Bill. The changes seek to increase the composite foreign investment cap in insurance companies from 26% to 49%. The composite cap includes foreign direct (FDI) and foreign portfolio investments.
The Bill is stuck in the Rajya Sabha. The ruling party, the Bharatiya Janata Party, is in minority in the upper house, and will need support from other parties there to get the bill passed. It was to be come in the House on December 16 but could not be taken up due to the clashes between the opposition and treasury benches.
Higher foreign equity cap will help insurance companies get more capital, say experts. Anoop Pabby, managing director and chief executive, DHFL Pramerica Life Insurance, says, "With companies focusing on growth and expansion, the penetration of insurance will increase and insurance availed of by many more in India. It will also give the industry the much-needed stability and enable it to focus on investing more on technology to revamp backend operations for smoother and better customer service."
The older players in the market such as HDFC Life and ICICI Prudential Life, who do not need capital immediately, are expected to come out with initial public offers once the Bill is passed.
In the context of DHFL Pramerica Life Insurance, Pabby says the partnership agreement between DHFL and Prudential (Pramerica is a trade name used by Prudential Financial) stipulates the situation where the FDI cap is lifted. Prudential has a long-standing desire to increase its stake to the percentage allowed under the regulations and the agreement provides for this. We will follow our agreement, subject to regulatory changes, he says. "As a company, our business objectives will continue to remain the same. Our aim is to be a preferred partner for our customers and distributors," he says.Experts say with more capital, the industry will be able to invest in innovative products in tune with the changing needs of customers. The increase in the FDI limit could also lead to merger and acquisition activity in the industry. The insurance Bill seeks to amend the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972, and the Insurance Regulatory and Development Authority Act, 1999.
The Bill has other provisions as well. One seeks to allow foreign re-insurers to open branches in India. It will facilitate the entry of Lloyd's of London as a foreign company in joint venture with Indian partners. It also proposes to enable appeal to the Securities Appellate Tribunal against decisions of the Insurance Regulatory and Development Authority or Irda. The Bill also seeks to give Irda freedom to decide commission rates while complying with the overall expense limit prescribed in The Insurance Act, 1938.
On high paid-up capital requirement of health insurers, the report states that "This sector, as compared to life and general insurance sectors, will discourage nonserious players from entering the field. The Committee, therefore, strongly recommends that capital requirements to ensure health insurers of adequate capacity to provide these critical services to all citizens of the country may be retained at the level of Rs 100 crore and health insurance be given the utmost priority."
For policyholders, the Bill proposes that no life insurance policy shall be called in question on any ground after three years instead of the existing provision of two years. At present, the insurer can reject a claim even after two years in case of fraud and misrepresentation of facts. If the Bill comes through, the insurer will not be able to challenge any policy after five years. The Bill also seeks to hold an insurer responsible for any fraud done by the agent. It proposes a penalty up to Rs 1 crore in case of fraud by agents.
Private insurers have said that it will be "too stiff for companies and companies, due to fear of losing Rs 1 crore from a single case, will restrict their workforce and recruit less agents. Therefore, a stringent penalty will discourage companies from expanding."