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Fate of Insurance Bill remains uncertain

The Insurance Laws (Amendment) Bill that would have enabled the insurance industry to have up to 49% foreign investment among other provisions is unlikely to be passed in the winter session of Parliament. 

While the ordinance route has not been ruled out to make it a law, industry sources said that they do not expect any immediate action on this front.

One of the key reforms proposed by Prime Minister Narendra Modi’s government, the Insurance Bill was to be presented in the Upper House first and then in the Lok Sabha. However, due to several disruptions, this Bill could not be taken up. 

While the Bill’s aim is to improve the overall condition of the insurance sector with respect to products and services, the key reform being proposed is to increase foreign direct investment (FDI) from 26% to 49%.

A composite limit, it will include all forms of foreign direct investment (FDI), foreign institutional investors (FII) and foreign portfolio investors. This could be a significant move to generate and invite FDI, and help the industry expand.

“We have been awaiting the passage of the Bill for several years. While this time the entire industry was confident of it being passed, the hurdles are still there. We are hoping that an ordinance to this effect is brought out by the government atleast before the end of this fiscal,” said the chief executive of a private sector life insurer.

The Bill has proposed an Indian management control. The board of directors of the insurance companies are likely to comprise Indian members, and the policy decision would be taken by them.

Officials claim they have observed foreign partners in joint venture firms influencing the decision-making process but with this reform their influence would be curtailed.

Senior executives of smaller life and general insurance companies said that the foreign partners were waiting for the FDI cap to be hiked before pumping in additional capital.

“Apart from existing JV partners, many large players from Asia have been interested in entering India as soon as the cap is raised. Lack of structured decision making on this front by the policy makers has been detrimental for the industry. An ordinance may be brought out to this effect, but will face stiff opposition,” said the underwriting head at a private non-life insurer.

Not just for insurers, the Bill makes provisions for reinsurers as well. The original proposal in the Bill to allow foreign insurers carry on the business of reinsurance in India through its branch offices has been omitted. However, the definition of ‘insurer’ has been widened to include a foreign company engaged in re-insurance business through a branch established in India.

Several life and general insurers have pre-signed shareholder agreements that allow the foreign partner to automatically increase its stake to 49% when the Bill is passed.

The chief executive at a mid-sized life insurance company explained that increasing the foreign partner’s stake would have ‘more skin in the game’ by way of investments in technology, personnel and product innovation.

Finance Minister Arun Jaitley in his Budget Speech had said that the Foreign Direct Investment (FDI) cap will be raised to 49% in the insurance sector, since the sector was capital starved.

When the Insurance Bill that was first introduced in Parliament in 2008, it faced huge opposition because of the FDI proposal. There were various routes proposed, including models like 23% through foreign institutional investor (FII) route and 26% through FDI. However, the Parliament was unable to arrive at a consensus.

The former United Progressive Alliance (UPA)-led government had also looked at hiking FDI in insurance to 49%, without any increase in voting rights. This, however, was not accepted by the other parties. 49% FDI for insurance and pension was mooted when Pranab Mukherjee was the finance minister, but the decision to approve the proposal was deferred by the Cabinet.

The Insurance Bill: What it means for customers and insurers:

-The revised Section 45 in the new Bill says no claim can be repudiated after three years of the policy being in force, even if a fraud is detected. This would mean that customers who have been mis-sold a policy can get their claims passed even if some discrepancies are seen in the policy or claim.

-The minimum capital for health insurance companies would be at Rs 100 crore, as against proposed Rs 50 crore. This would mean that only serious companies would get into business.

-Health insurance has been defined clearly as those contracts that provide for sickness benefits or medical, surgical or hospital expense benefits, whether in-patient or out-patient travel cover and personal accident cover.

-Indian management control has been proposed. Clarity is awaited on what this would mean and whether there would be a cap on voting rights

-Insurers can now approach Securities Appellate Tribunal (SAT) for redressal of grievances against Insurance Regulatory and Development Authority

-Section 40A of Insurance Act which relates to agent commission limits has been omitted in this Bill. Irda will have to bring out fresh norms for agent commission and caps thereof. A large portion of first year premium paid by policyholders goes towards paying commissions and it is not clear whether Irda will set caps or let individual insurers decide. 

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