By Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services LLP
The Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, passed by both houses of Parliament in December, represents a selective implementation of the 2024 draft proposals. The amendment to the law was largely designed with an ambitious government objective of insurance for all by 2047. Considering the exclusion of a vast proportion, the amendment was aimed at providing the necessary supply of insurance cover and products by augmenting the capacity of providers through the FDI route with limit expansion from 74% to 100%. The reforms associated with demand creation and affordability of insurance are yet to be worked out.
While the amended law delivers critical reforms on foreign investment liberalisation, regulatory empowerment, and to a certain extent operational efficiency, it has deferred or excluded several transformative provisions demanded by the stakeholders, and in many cases determined by the policymakers’ understanding of the industry. One such reform was the composite insurance licensing envisaged by policymakers. Then there was the licensing of captive companies. The major reform associated with opening the agency distribution channel with an open architecture approach and making it attractive for foreign strategic investors is also dropped from the original draft. This article discusses the reforms and their likely impact on industry.
The central reform increases the FDI cap to 100%, formalised in the new Section 3AA of the Insurance Act. The provision addresses longstanding capital constraints and operational flexibility for foreign partners in joint ventures (JVs). At a hypothetical estimation, the potential flow of FDI in the life, general, and health insurance sectors could be around Rs 2.5 lakh crore ($30 billion), at market value in case of all existing JVs. The fresh FDI from new strategic investments flowing from foreign insurance firms, who could possibly look at entering the Indian market, is anyone’s guess. The question in the minds of industry experts and players is whether this order of FDI will actually flow in.
In order to take the new reforms to possible entrants, work had begun almost two years ago. The regulator and the policymaker, along with the industry leaders, held roadshows and discussions in several countries in late 2024 and early 2025. The existing foreign partners in their JVs in India were also approached, and aspects of proposed regulation and ease of entry were presented. The potential flow seemed to be very encouraging.
After the roadshows, however, one could expect a certain order of curtailment and dislike from interested parties as what was promised in the draft has not been delivered. Let us now examine the ground reality. When the FDI limit was raised from 26% to 49%, the actual FDI inflow was at best about 12% of the potential. Several limitations such as Indian ownership and management control were deterrents to the inflow. Then the FDI limits were enhanced to 74%.
Once again, the gap between the actual flow and the potential was very large. What ground realities are at play that cause this gap? The most critical is the fundamental truism that insurance is to be sold; it is a push product. Distribution is more critical in the working of an insurance company than manufacturing. For distribution, the foreign entities need good Indian partners, the financial conglomerates in India or those corporates who have a large customer base across the country.
This is one reason which has contributed to the success of the existing JVs. Banks, non-banking financial companies, or business house-owned financial conglomerates who promoted insurance firms jointly with their respective foreign partners have performed well. In these partnerships in the last 25 years, the foreign partners do not have a significant role and many of the original promoters have exited the market. The Indian partner in case of the top life, general, and health insurers now manage the companies or have a substantial say in their working. It is very unlikely that the foreign partner will contemplate acquiring equity from their Indian partner who is contributing substantially to the business value. Even the new entrants will come to the market after they identify their Indian distribution partner. Unfortunately, there are very few Indian promoters available.
Let us now look at the critical omissions in the Act compared with the draft amendment Bill, 2024. The first major strategic retreat is composite insurance licensing. The ability for a single insurer to operate across life, general and health segments under unified regulatory treatment in the absence of any preamble or background to the reform was attributed by the industry to the possibility of creating a platform for the public sector life company to acquire the four public sector general insurance entities. Little is known about the purpose of the provision in the draft Bill and its omission in the Act.
Under Section 2(5A) of the Act, by way of a linguistic formulation, the government in consultation with the regulator may notify a composite class of insurance companies. However, the government has chosen not to implement composite licensing immediately. The other proposal of making agency channel from dedicated to open-architecture approach has also been omitted. This will dissuade some foreign entities from entering the market but protects the interest of existing ones. Then again, the proposal of broader financial product distribution by insurers has been significantly diluted.
The 2024 draft proposed permitting insurers to distribute financial products such as mutual funds, loans, and credit cards creating integrated financial services propositions. The Act restricts the expansion. The new Section 6D defines “insurance business” as the “business of effecting insurance contracts and includes any other form of contract as may be notified by central government”.
Based on the public announcements made by the leadership at the regulator’s office, in the span of last three years there have been almost 30-plus applications for new insurance companies. Quite a few of them had elements of FDI in it. As we understand, only a handful have been approved by the authority. Perhaps there is no clarity on the fit and proper aspect of the proposed promoters. This has created uncertainty in the minds of foreign investors who are looking at the sector, particularly after the FDI reform. Both policymakers and the regulator could perhaps clarify the kind of promoter entities who could enter the market.
The amended Act has paved the way for foreign entities to place their bet on the insurance market in India. Much needs to be done in promoting the reform and on the part of the regulator to design conducive regulations.