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Straight from the Specialists

Time for a relook at FDI in insurance intermediaries

By Deepak Yohannan
January 24, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

Insurance companies in India have an FDI limit of 26 percent, which may be revised upwards in the coming months. The industry requires funds to grow and the revision can be an enabler, but the process may take some time as it requires legislative approval and there seems to be some opposition to the move.

Since the industry is still in its nascent stage, the insurance regulator also places the same FDI cap on insurance intermediaries such as brokers and web aggregators, severely limiting their ability to raise funds to grow their business.

I will attempt to elaborate why this cap should be done away with completely.

The need to scale

Today’s entrepreneurs are ambitious and want to run businesses which have attractive, if not massive, scale. And in a growing market like India, the scale is available but tapping into it can be an expensive affair.

Successful online ventures that offer their services in India have all received generous backing from venture capital (VC) funds. Because of this, they have been able to scale up their businesses and offer a far superior value proposition to the end consumer.

While the proof of concept for any business does not require too much money, to grow it definitely requires funding.

Risk rationale does not hold for intermediaries
They do not create any systemic risk to the financial ecosystem of the insurance industry. The biggest risk an intermediary provides is of mis-selling or deficiency in service and that is not lessened by an FDI cap.

In fact, with access to lesser funds, the chances of cutting corners, and not putting proper systems and resources in place, increases substantially. This is a bigger risk and may be the larger problem at hand.

For example, a world of difference can be achieved if investment in technology is done by a third-party administrator to improve the claims handling process. It could be a crucial differentiator.

The insurance regulator has received a request from various stakeholders to do away with the FDI cap. It has set up a committee to take a second look at this mandate — a much needed move.

(For more articles by Deepak Yohannan, visit MyInsuranceClub.com or tweet him @dyohannan)

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