FDI in insurance may shorten break-even period by 3 years: IIM Indore study



The hike in foreign direct investment (FDI) limit from 49 per cent to 74 per cent in the sector is set to shorten the break-even period for the industry in India from current eight years to five, finds a working paper by the Indian Institute of Management (IIM) Indore.


The study says the move will provide the Indian sector much needed impetus to develop physical & digital infrastructure, recruit and train skilled manpower, design innovative products, add new channels and develop new business models to reach the low-income segment of the population.



Titled ‘in Insurance: Meaning and Impact’, the paper has been authored by faculty Prashant Salwan and studies the impact of the amended bill passed in Lok Sabha recently.


“Indian insurance firms need to develop physical & digital infrastructure, recruiting and training of skilled manpower, design innovative products, add new channels and develop new business models to reach the low-income people in India. These all strategies require huge investments. Moreover, it takes around eight years for an insurance firm to make profits in Indian insurance market which would come down by three years to just five years post FDI,” Salwan tells Business Standard.

ALSO READ: FM promises safeguards; Rajya Sabha passes Bill to hike FDI in insurance


Currently, operating (OE) and commission expenses (CE) of private insurers are believed to be thrice those of their public counterparts. It is here that the paper suggests a hike in limit will give private players a level-playing field.


According to the paper, there are seven public sector firms and 61 private sector firms in the insurance sector, with 421,000 employees in the sector, of which 63 per cent are in the private sector. “Out of 3.1 million insurance agents, 58 per cent of them are in the private sector. Private insurers captured 56 per cent market share in non life insurance and 31.3 per cent market share in life insurance in FY 21,” it states.


Salwan argues in the paper that the Indian insurance firms also need learning experience in managing the growing market of India. And it is here that both funds and experience can be leveraged through an international joint venture partner who already has experience in a mature market specially in technology platforms and developing product mix.


“Adding of and international knowledge transfer coupled with digitalization will increase the service level and make Indian insurance firms more consumer friendly including claim settlement. This would benefit the common man,” the paper further states.


Moreover, FDI will also increase specialized job creation mainly in channels, agents, product development and services. Further, pension sector will also get a huge boost as the FDI limit in the pension sector is linked to the insurance sector.


According to the paper, the increased FDI will also result in a higher insurance penetration and density among Indian households. Citing an RBI research, the paper reiterates that there is a strong negative correlation between participation in insurance and the incidence of non-institutional source debt.


“In India households use high-cost borrowing for managing risks. This high-cost informal borrowing results in high interest payments on debt resulting in the unending debt cycle. As insurance penetration and density increases many people will come out of this debt cycle,” it further states.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor





Source link

Free Course

"Double Your Traffic in 30 days" + Secret Bonus

valued at $299

This amazing course will teach you, step by step, how to double if not triple your traffic over the next 30 days.

100% Privacy. We will never spam you!