Indias current account deficit is expected to be 5 per cent of GDP this fiscal year.

With the deficit still growing and FDI inflows declining (with the exception of the numbers for January 2013), the government needs to facilitate investment in the economy.

The solution of the governments Chief Economic Advisor is to increase the share of the insurance sector that foreign companies can own to 49 per cent. The government should be listening. The insurance sector is more amenable to large increases in FDI because it is free from problems of land acquisition, environmental clearances and other burdensome layers of regulation imposed by both federal and state governments. In 1999 the federal government created the Insurance Regulatory Development Authority (IRDA) and changed the regulations that govern the insurance sector. Since then, many private insurance companies have entered the market, offering multiple insurance products catering to different members of society. But although the increased participation of the private sector has allowed more people to access insurance there is still room for improvement. The ratio of premiums underwritten in a given year to GDP (insurance penetration) remains relatively low, at 4.1 per cent. The reason the figure is so low is mainly because India is ranked 52 in the world for non-life-insurance penetration. The number of lifeinsurance premiums being issued is more satisfactory at 3.4 per cent the ratio is only 0.4 percentage points below the world average. But, overall, that means Indias penetration rate is well behind the ratios of the United Kingdom (12.5 per cent) Japan (10.5 per cent) South Korea (10.3 per cent) and the United States (9.2 per cent). One reason for this problem could be that insurance remains a push rather than a pull product in India. Due to low per capita income and poor education, not many Indians are aware of insurance products and their benefits, and there is a mismatch between expected returns and actual benefits. The problems in this sector are high customer acquisition costs, low customer-centric service excellence, low ability to detect frauds, focus on actuarial pricing, regulatory misunderstanding and settlement procedures. The sector will grow naturally if it lowers the costs of acquiring new customers and improves customer service regulations and settlement procedures. IRDA has set up a campaign to gauge how people view insurance products across states and union territories, which should encourage companies to offer insurance to people and businesses in small towns and less-developed districts. The campaign will improve insurance penetration and encourage companies to improve their distribution networks, manage risk more effectively and, most importantly, create insurance products that appeal to a more diverse range of clients. IRDA estimates that if insurance companies are to perform all these functions while maintaining and increasing their customer base they will need to raise approximately 612 billion rupees. But Indian capital markets will not be able to provide this amount of money. An increased FDI cap would remove the problem because inflows would fulfill this much-needed long-term finance requirement. They would also help finance the current account deficit. Along with funds, large foreign firms would bring better insurance products and superior technological capabilities. Foreign know-how would also help the Indian insurance industry improve the way it underwrites and manages claims, and analyses actuarial data. The insurance sector in developed countries is very sophisticated and competitive compared to India. For example, the insurance sector in India has barely 51 participating firms and US$50 billion in gross premiums, while in the United States there are 1000 insurers and gross premiums exceed US$700 billion. American insurers have both the experience and capital necessary to help expand the Indian

market. Health insurance, which is the fastest-growing insurance sector in India, looks to have the most potential. Finally, the way the global insurance industry relates to its customers is changing. Insurance agents are no longer mere intermediaries between customers and the company; they are advisors who provide significant financial assistance to their clients. A larger inflow of foreign capital and ideas would help train Indian agents to provide this service and enhance customer satisfaction as a result. A better relationship between agents and clients would eventually lead to a decrease in insurance premiums because of enhanced efficiency and innovation in the sector. Cabinets approval of a bill to increase the foreign investment limit indicates that the government recognises the industrys needs. But the bill must still pass Parliament. The insurance sector needs to grow to protect the vulnerabilities of millions against uncertainty and disaster, but growth depends on effective regulation and a competitive market. Increased foreign investment in the sector would bring in much-needed capital, competition and efficiency. It would also reduce regional disparities and enhance insurance penetration in hard-to-reach areas. But a proper regulatory system needs to be in place to make sure crises, like the situation in 2008, do not occur in India.

The central government has proposed to enhance foreign direct investment (FDI) in insurance to 49% in its second wave of reforms announced recently. At present foreign investment in private insurance companies is restricted to 26% of their capital, which is now proposed to be increased to 49% by passing an amendment to the Insurance Act in the ensuing session of Parliament. Announcing this decision, finance minister P Chidambaram said the benefits of thisamendment to the insurance act will go to the private sector insurance companies, which require huge amounts of capital and that capital will be facilitated with the increase in foreign investment to 49%. He also clarified that this will not apply to public sector insurers like Life Insurance Corporation of India (LIC) and the five general insurance companies. At present there are 44 private insurance companies authorized by the Insurance Regulatory and Development Authority (IRDA) operating in the country. These comprise of 23 life insurance, 17 general insurance and four health insurance companies, since the insurance sector was opened for private sector in the year 2000. These are all joint ventures between the Indian promoters who hold up to 76% and foreign insurance companies who hold up to 26% as mandated by the law. The insurance business requires additional capital as it grows and this has to come from the promoters. If the Indian promoters are unable to contribute their share of the capital, they will not be able to grow. Foreign companies with deep pockets will be able to fill this gap, if they are allowed to invest up to 49% of the capital. It is

estimated that the private insurers need about Rs60,000 crore of additional capital during the next five years. Therefore, the raising of FDI cap to 49% will come handy for the foreign partner to increase their stake in the company, without the local partner having to put matching capital in to the company. The foreign partner will be more than happy to increase its stake, as it will help it get a bigger share of the pie, and will also give it a larger role in running the company according to its ways, by virtue of a higher shareholding in the company. This will, therefore, be a boon to the foreign insurers to come to India in a big way.

Does this benefit the common man?

This change does not benefit the common man, as he is the target for all insurance companies, whether Indian or foreign, who try to extract maximum business from the gullible public, who are carried away by the sweet talk and tall promises made by the insurance salesmen. In fact they are concerned more about their own commission rather than the welfare of the insured. Insurance business is one where there is rampant mis-selling and the insurance companies go scot free because of a number of conditions included in the policy in small print, but never communicated in advance. Our country has a low insurance density and every company selling the insurance feels that there is abundant scope to expand its operations and hence this proposal to increase FDI in insurance has been received with great applause by the industry. Only time alone will tell whether this irrational exuberance is justified considering the fact that there is political opposition to this move and this change requires approval of the Parliament. If and when this proposal becomes a law there is bound to be a great demand from foreign companies to enter our country because of the abundant opportunity provided by the large population and the growing per capita income of our people. During the last twelve years, if over 40 foreign companies have entered our country as joint venture partners, with the increased FDI cap, we may expect another 100 companies to come within the next twelve years. Unfortunately, some of our people are carried away by the foreign names and brands, and that there is a perception among our people that foreign companies are better than the home-grown companies. But the fact is that foreign companies are as bad as or as good as local

companies, and insurance business, whether run by Indians or by foreigners has the same objective, as in all business, of maximizing returns to the owners even at the cost of the insured.

How to protect aam aadmi from exploitation by the insurance companies?

It is abundantly clear that mere hiking the FDI cap to 49% does not in any way benefit the common man, unless it is accompanied by stringent regulations to protect the aam aadmi from exploitation.

Introduction:
The insurance sector has been a fast developing sector with substantial revenue growth in the non-life insurance market, but in spite of its huge population, India only accounts for 3.4% of the Asia-Pacific general insurance market's value. The cap on foreign companies equity stake in insurance joint venture is 26%, but is expected to rise to 49%.

The investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal. Foreign investment, in addition to technological improvement and expertise, brings with it a plenty of risks. An increase in the size of foreign holding in the insurance sector will certainly expose the country to risks. At the same time, it is important to recognize that FDI in Insurance can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the Insurance sector.

Size of the Insurance sector in India:

Insurance is a US$41-billion industry in India, and Increased by 36% in 2006-07 over the previous year. Life Insurance-US$35 billion industry with US$24 billion accounting for First Year Premium. Non-Life Insurance-US$5.6billion industry.

Competition in the Insurance Sector:

Even after the liberalization of the insurance sector, the public sector insurance companies continue to dominate the insurance market, enjoying over 90 per cent of the market share. In fact, the LIC, which is the only public sector life insurer, enjoys over 98 per cent of the market share in Life insurance. According to the Annual Report of the IRDA, 9 out of the 12 private companies in life insurance suffered losses in 2002-03. The aggregate loss of the private life insurers amounted to Rs. 38633 lakhs in contrast to the Rs.9620 crores profit earned by life India Corporation. When we look at the profit ratios the public sector insurance companies have more profit and even in the private players say for Reliance have more profit but have no foreign equity. If profit is considered as one parameter to measure the performance then the cap on the FDI in insurance won't have any significant change. Insurance Sector in India poised for tremendous expansion: RDA has also notified Micro Insurance regulations facilitating insurers to tap the potential of rural markets. It is evidenced that micro insurance would facilitate access of insurance to rural and remote areas. Micro Insurance being an integral part of overall insurance system, attempts to offer the target specific insurance products at a moderately lower cost, for a lower coverage of amount. Foreign equity upto 26% is allowed in the insurance sector. The entry of foreign partners has resulted in the sector attracting FDI of US 543 million as on 31st March, 2007. The private companies have formed a niche for themselves. They have been able to increase their share in the insurance market in competition with their counterparts in the public sector. As a part of the reform process, premium rates for non-life insurance products have been de-tariffed w.e.f. 1.1.2007.

Insurance sector though the growth in recent years has been significant, India is far behind the world averages and ranks 78th in terms of insurance density and 54 th in terms of insurance penetration. The world averages are US $ 469.6 in terms of insurance density and 8.06% in terms of insurance penetration. Against this, insurance density was US$ 19.70 and insurance penetration was 3.17% in India for the year 2003. Freedom for profit on sale of investments: To support general insurance players to be vibrant participants in capital markets, there is a requirement for specific release from income-tax on profit on sale of investments. The issue of acceptability of UPR (unexpired premium reserves) as per IRDA regulations rather than as per Insurance Act only, for IT deductions. The UPR is at present restricted to the extent of limits specified in rule 6E of the Income Tax rules due to which insurance companies need to pay tax beyond their profit disclosed in their audited accounts.

Implications for Resource Mobilization:

No change seems to have occurred as far as mobilizing savings by the insurance sector is concerned, following the liberalization of the insurance sector in 1999. Data from the RBI show that the trend of the savings in life insurance by the households to GDP ratio, while showing a clear upward trend increasing business for the insurance sector, any technological innovation in the insurance business, which would have created greater enthusiasm in savings mobilization. Raising the FDI cap also does not seem justifiable as far as channelizing savings into investments are concerned. Despite the FDI cap being set at 26%, the investment from the insurance sector to the infrastructure sector was predominantly from the public sector companies. Therefore, the argument that raising the FDI cap in the insurance sector would help in mobilizing resources. On the other hand, greater foreign control is more likely to lead to a decline in the share of investment.

Survey on the service industry:

"In the case of services sector, a more conducive environment can be created by liberalizing FDI in services like health insurance, rural banking and higher education as FDI inflows and trade in services has a close relationship." "Well thought out policy measures would give a boost to the services sector."

Policy:
FDI up to 26% is permitted under the automatic route subject to obtaining a license from the Insurance Regulatory and Development Authority (IRDA) Intention to increase FDI up to 49% Insurance Regulatory Development Authority (IRDA) is the regulator for the Insurance industry

In a landmark move the government detariffed the General Insurance business on 1st January, 2007.

Salient Features of Insurance Sector Reform Bill:

The bill seeks to regulate, promote and ensure orderly growth of the insurance industry and provides for solvency norms and specifies that the funds of policyholders would be retained within the country. The minimum capital requirement for life and general insurance has been retained at Rs 100 crores ($23.02 million) and for reinsurance firms at Rs 200 crores ($46.04 million) as provided in the earlier IRA Bill.

Advantages:
One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made. Foreign directinvestmenthelpsin the creation of new jobs in a particular country. It becomes easier for the business entities to borrowfinanceat lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium-sized business enterprises. The growth of FDI in India boosted the economic growth of the country. Major advantages of FDI in India have been in terms of -

Increased capital flow. Improved technology. Management expertise. Access to international markets.

Disadvantages:
A higher foreign direct investment (FDI) will unshackle the insurance industry and drive growth and long-term development, enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration. Over Rs 10,000 crore of foreign capital could flow into the country if the Government were to pass the Insurance Amendment Bill that raises the FDI limit. More players in the market would increase the flow of more money in the market which would have impact on the economic drivers of the country. Inflation rates would have an impact due to the heavy load of money in the country. Government has to take measures to control it.

Conclusion:
Governments of the superior countries like the U.S. continue to apply stress on developing countries to open up their insurance sectors. China, for instance was pressurized to open up its insurance sector, in return of its entry into the WTO. However the strong countries dictate the terms to the developing countries and FDI would help in countries to grow and know the potential of the country and find out a target market for the product or service been offered. The more stake of FDI in the country would have a very great impact on the economic conditions of the country.