For all the hard lobbying by the United States and European governments and foreign insurance majors, the Indian government is unlikely to increase the foreign direction investment (FDI) limit in insurance from the current level of 26 per cent.
The government, however, will open up the health insurance sector to 'pure play' insurance companies - those which specialise in health insurance alone, without offering any other insurance products.
Finance Minister P Chidambaram had proposed hiking the limit to 49 per cent in the 2004-05 budget itself. However, the amendment to Insurance Regulatory and Development Authority Bill that would be required to allow this was never brought to Parliament following the opposition of the left parties. Once again, bowing to the left, sources close to the finance ministry on condition of anonymity indicated, the government has decided to not to bring up the matter in the budget.
Foreign insurance giants have been urging the government to raise the limit so that they can bring in the additional capital they need to sustain growth, and expand operations.
“Since the insurance industry is highly capital intensive and has a long-term gestation period, there is urgent need for more resource mobilisation. Indian partners in the insurance business are not in the position to meet the capital requirement to expand. Lack of capital may slow down the sector's growth,” sources in the government said.
The IRDA has also supported the proposal to hike the FDI limit to 49 per cent.
Life insurance business has been growing at 46 per cent for the first nine months of the current financial year. However the growth at present is driven by unit-linked policies in which the investment risk is on the policyholders. With private sector players examining savings-linked and pure risk policies too for powering their rural forays, the insurance companies face huge requirement of capital.
Sources close to the finance ministry also added the government would permit the pure play health insurance companies. Currently, non life insurance companies provide health insurance under Mediclaim. The life insurance companies provide health insurance mostly as rider or combo products. There are many leading foreign companies such as Aetna, which are planning to start health insurance in India.
The government plans to permit health insurance companies with a paid up capital of Rs 50 crore. However, in this case also, FDI would be restricted to 26 per cent.