India's Insurance Revolution: 100% FDI and Its Implications

On February 1, 2025, the Finance Minister of India, in her Union Budget speech, announced an increase in the Foreign Direct Investment (FDI) cap in Indian insurance companies from 74% to 100%. This decision follows the public consultation initiated by the Ministry of Finance in November 2024 to amend the Insurance Act, 1938.

This is a pivotal step in the liberalisation of India's insurance sector, making it more attractive to foreign investors while strengthening the financial ecosystem. With insurance penetration in India standing at 3.7% in FY 2023-24, well below the global average (6.8%), US (12%) and China (4%), there is a clear need for greater capital infusion and market expansion. The policy shift is expected to attract investments and enhance technology transfers and competition, ultimately benefiting policyholders and deepening market penetration. It also aligns with the Insurance Regulatory and Development Authority of India’s (IRDAI) vision of ‘Insurance for All’ by 2047.

Key Aspects of the 100% FDI Policy

The Finance Minister emphasized that the 100% FDI cap wouldapply only to insurers that invest all premium collections within India. Since policyholder funds are already restricted from overseas investment, the emphasis on this condition raises concerns about potential new restrictions on shareholder funds, which could impact capital flexibility and investor confidence.
The Finance Minister also noted that FDI-related conditions and regulatory requirements would be simplified. IRDAI has been consolidating various regulations to make compliance easier. While any further simplification will be welcome, the specifics of these changes remain unclear.
Although the Finance Minister did not explicitly mention composite insurance licenses which would allow insurers to offer both life and non-life coverage under a single license, this does not mean the proposal has been shelved. The industry awaits clarity on this and other proposals from the November 2024 public consultations.

Next steps and implementation timelines

The increase in FDI limits will not take effect immediately and will require legislative and regulatory changes. 

The Insurance Act must be amended by both houses of Parliament, followed by Presidential assent and official notification in the Government of India’s Gazette. Given the government’s strong parliamentary majority, this process is expected to be swift. In 2021, when the FDI limit was raised from 49% to 74%, the bill was introduced, passed, and received Presidential assent within seven weeks.

Following legislative approval, IRDAI will need to revise its regulations. In 2021, these amendments were issued about six months after the legislative approval.

Currently, insurers with foreign investment must ensure that resident Indian citizens constitute: a majority of their directors, a majority of their key management personnel, and at least one amongst the Chairperson of the board, managing director, or chief executive officer of the insurer.

Additionally, insurers with foreign investment exceeding 49% are subject to stricter governance norms, requiring a majority of their board members to be independent directors. Such insurers are also subject to solvency-linked dividend restrictions. These regulatory safeguards will likely continue under the 100% FDI regime.
Additionally, foreign exchange rules must be amended to reflect the new 100% cap. In 2021, these amendments followed 15 days after IRDAI issued its revised framework. 
If the government follows a similar timeline to the 2021 reforms, the legislative process could be completed within two months, with full implementation expected by late 2025. However, given the complexity of reforms and multi-stakeholder alignment, minor delays cannot be ruled out.

Impact of 100% FDI on the Insurance Sector

In the past, Indian partner’s inability to fund their proportional share of capital hindered insurers from raising funds from foreign shareholders. The removal of this constraint will likely facilitate capitalaccess, allowing insurers to expand, innovate and scale operations faster.

Previously, foreign insurers required a local partner, which often posed challenges in finding the right collaborator. Foreign Private Equity (PE) firms also faced barriers due to the mandatory 26% Indian ownership requirement. With 100% FDI,foreign insurers and PE investors can now fund and back insurance ventures independently, increasing capital inflows and facilitating specialized insurance products for Indian consumers.

With full foreign ownership, existing Joint Ventures (JVs) will likely undergo restructuring. Indian insurers and promoters with strong bancassurance and agency networks could become preferred partners for global entrants. Mid-sized insurers may consolidate to enhance their competitiveness. 
These changes could trigger a wave of strategic alliances, mergers, and acquisitions, reshaping the competitive landscape of the Indian insurance sector.

Despite steady growth, India’s insurance penetration remains low, with life insurance penetration at 3.2% and general insurance below 1%. Higher FDI limits will boost investment in distribution networks, digital technology, and customer service, leading to better coverage and greater financial inclusion.

Conclusion: A Defining Moment for Indian Insurance

The 100% FDI policy is a transformative step towards realising "Insurance for All by 2047". It is expected to attract global insurers, enhance competition, improve insurance penetration, and expand customer offerings.

If executed efficiently, this could mark the dawn of Insurance 2.0 in India—an era defined by greater accessibility, affordability, and innovation, transforming the sector into a more competitive, inclusive, and technologically advanced ecosystem. 

The success of this reform depends on timely regulatory alignment and a policy framework that encourages investment while maintaining oversight. The coming months will be pivotal as the government balances regulatory control with market-driven expansion. 

With global insurers, private equity investors, and domestic players recalibrating their strategies, all eyes are on how the government will navigate the next phase of India's insurance evolution.

The author is a Partner at Khaitan & Co, specialising in mergers and acquisitions, with a focus on financial services and insurance. He can be reached at aravind.venugopal@khaitanco.com.