Is higher FDI limit in insurance a threat for public sector insurers?

Siddharth Tak / Zee Research Group/ DelhiThe huge probability of the Insurance Laws (Amendment) Bill getting an approval in the parliament during the winter session has started to increase the anxiety levels of Public Sector Insurers as they are already struggling to arrest the decline in their market share. Recently, Cabinet has cleared an important decision to increase Foreign Direct Investments (FDI) limit from 26 percent, capped in 1999, up to 49 percent in Indian insurance companies.

During the last decade (2001-02 to 2011-12), the market share of the public sector insurers has decreased due to new entrants in the private sector. A Zee Research Group (ZRG) analysis reveals that Life insurance Corporation (LIC) has been struggling to maintain the market share in segments, life and non life, since 1999, when 26 percent FDI was allowed in the insurance sector.

Public sector insurer, LIC, in its bread and butter segment (Life segment) has lost a significant market share from 98.65 percent in 2001-02 to 71.40 percent in 2011-12. On the other hand, during the corresponding period, the market share of private sector life insurers has increased from 1.35 percent to 28.6 percent. With regards to the market share of Public sector insurer in the non-life segment has decreased to 58.46 percent in 2011-12 from 95.91 percent in 2001-02. The massive potential in the Indian life and non-life insurance sector has encouraged large private financial services companies to form joint ventures with global insurers. Some of the prominent private players of this sector include the names of Bajaj Allianz, Birla Sunlife, ICICI Prudential, Tata AIG, HDFC Standard Life, Reliance Life, Max Life and so on.

On the declining market share of public sector insurers, S B Mathur, former LIC Chairman, opined, “Something has to happen when 24 private players are doing business in the insurance sector. Increase in FDI limit can lead to greater penetration of retail market. Consequently, the general and non-life public sectors insurers could feel the rub-off effect mainly due to the cut throat competition from the private players in the country.”

Mathur’s thought got an endorsement from N S R Chandraprasad, Chairman and Managing Director, National Insurance Company (NIC), who averred, “FDI in insurance will be the threat for the public sector companies because the growth in the numbers of private players will affect the market share of public sector insurers in the country.”