INTRODUCTION

The insurance sector is of considerable importance to every developing economy; it inculcates the savings habit, which in turn generates long-term investible funds for infrastructure building. India is fast emerging on the world map as a strong economy and a global power. With a huge population and large untapped market, life and non life insurance happens to be a big opportunity in India. Soon after the liberalization, there was a remarkable improvement in the Indian insurance industry. After 1991, the Indian insurance industry has geared up in all respects, as well as it being forced to face a lot of healthy competition from many national as well as international private insurance players. The insurance sector in India used to be dominated by the state-owned Life Insurance Corporation and the General Insurance Corporation and its four subsidiaries. But in 1999, the Insurance Regulatory and Development Authority (IRDA) Bill opened it up to private and foreign players, whose share in the insurance market has been rising. As a part of overall financial sector reforms, the Government set up the Committee for Reforms in the Insurance Sector in 1992. In its report released in early 1994, it recommended the opening up of the sector to private sector participation. This was done in 2000. Since then there has been rapid growth and share of insurance in total financial savings of the economy has improved significantly. The number of life insurance companies has increased from 13 at end March, 2003 to 18 at end March, 2008. Competition in the industry is increasing with new players trying to establish a significant presence. Currently the total insurance market in India is about US$ 30 billion, in which the element of FDI is US$ 0.5 billion. This is 1.6% of total insurance business in India. Foreign direct investment (FDIs) will increase in insurance sector by US$ 0.46 billion in next 2 years and likely to touch US$ 0.96 billion as it is still regulated.
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RELEVANCE OF THE TOPIC

Currently, only 26% of FDIs is permitted in insurance sector. The total insurance business would touch US$ 60 billion size. If insurance sector is opened up to an extent of 49% for FDIs, it is expected that FDIs contribution to insurance business would touch nearly US$ 2 billion. Insurance penetration in India is lower than in many East Asian countries. But the penetration as a percentage of GDP has improved from 2.5 in 2005 to 4.0 in 2007 for life insurance in India

What is Insurance?
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the
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frequency and severity of the event occurring. In order to be insurable, the risk insured against must meet certain characteristics in order to be an insurable risk. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.

History of Insurance
In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: natural or non-monetary economies (using barter and trade with no centralized nor standardized set of financial instruments) and more modern monetary economies (with markets, currency, financial instruments and so on). The former is more primitive and the insurance in such economies entails agreements of mutual aid. If one family's house is destroyed the neighbors are committed to help rebuild. Granaries housed another primitive form of insurance to indemnify against famines. Often informal or formally intrinsic to local religious customs, this type of insurance has survived to the present day in some countries where a modern money economy with its financial instruments is not widespread. Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The
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Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea. Achaemenian monarchs of Ancient Persia were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices. The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contribution-ship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry primary resides with individual state insurance departments. The current state insurance regulatory framework has its roots in the 19th century, when New Hampshire appointed

the first insurance commissioner in 1851. Congress adopted the McCarranFerguson Act in 1945, which declared that states should regulate the business of insurance and to affirm that the continued regulation of the insurance industry by the states is in the public's best interest. The Financial Modernization Act of 1999, commonly referred to as "Gramm-Leach-Bliley", established a comprehensive framework to authorize affiliations between banks, securities firms, and insurers, and once again acknowledged that states should regulate insurance. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through the National Association of Insurance Commissioners. In recent years,

In 2010, the federal Dodd-Frank Wall Street Reform and Consumer Protection Act established the Federal Insurance Office ("FIO"). FIO is part of the U.S. Department of the Treasury and it monitors all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that may contribute to a systemic crisis in the insurance industry or in the U.S. financial system. FIO coordinates and develops federal policy on prudential aspects of international insurance matters, including representing the U.S. in the International Association of Insurance Supervisors. FIO also assists the U.S. Secretary of Treasury with negotiating (with the U.S. Trade Representative) certain international agreements. Moreover, FIO monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderateincome persons. The Office also assists the U.S. Secretary of the Treasury with administering the Terrorism Risk Insurance Program. However, FIO is not a
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regulator or supervisor. The regulation of insurance continues to reside with the states

Growth and Development of Insurance Sector in India

In a majority of developing countries, it is not surprising that a large percentage of domestic saving is from insurance plans. But the very surprising fact is that developing countries are placed very high on that very list. The most surprising entry is South Africa at No. 2. India for that matter lies between China and Italy, which is very surprising considering the levels of economic development of these countries. This just goes to prove that there is a high presence of insurance in the country despite of the low per capita income. This ensures a very promising future for the insurance market in the country as naturally it will rise when the per capita income increases. A part of functioning that a company needs to improve drastically is their customer service. An insurance company should make provisions for paying interest in case there is a delay of payment on the stipulated amount of time. Another very important aspect that needs to be improved is technology. In today's digital world, a company should make sure that all their data is computerized and also that all information related to their policies should be available online. This is very important as this will improve their clientele drastically as potential customers are just a click away right from their home. It
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will also help them to employ fewer insurance agents which will be economically beneficial to them. It will also be beneficial if they could upload videos by an expert which will include an exhaustive explanation of their policies. The biggest advantage is that infiltration rates of all the non-life insurance at certain developing nations are much below the infiltration rates of the companies at the international level. Since opening the insurance sector, investments from foreign countries has flown into the Asian markets. This is when the life insurance sector began to grow at a massive rate while the non life insurance sector also recorded a steep rise. Many banks have also displayed interest in entering the insurance market individually as well as a joint venture. It is definitely not a possibility that a big name will collapse in the next decade or two as the governing body has developed very slowly and have been especially cautious to the granting of licenses. Over the next few decades there is bound to be an increase in the insurance sector in developing countries as the development is directly proportional to the per capita income. There are also many banks who have decided to enter the insurance sector. The insurance sector should experience a boom in the next couple of decades.

Role of Insurance Sector in Growth Indian Economy

Insurance is the only sector which garners long term savings

Insurers are increasingly introducing innovative products to meet the specific needs of the prospective policyholders. An evolving insurance sector is of vital importance for economic growth. While encouraging savings habit it also provides a safety net to both enterprises and Individuals.

Insurance Companies receive, without much default, a steady cash stream of premium or contributions to pension plans. Various actuary studies and models enable them to predict, relatively accurately, their expected cash outflows. For GDP to grow at 8 to 10%, qualitative improvement in infrastructure is essential. Estimates of funds required for development of infrastructure vary widely. An investment of 6,19,600 crore is anticipated in the next 5 years. Tenure of funding required for infrastructure normally ranges from 10 to 20 years. The insurance industry also provides crucial financial intermediary services, transferring funds from the insured to capital investment, critical for continued economic expansion and growth, simultaneously generating longterm funds for infrastructure development. In fact infrastructure investments are ideal for asset-liability matching for life insurance companies given their long term liability profile. According to preliminary estimates published by the Reserve Bank of India, contribution of insurance funds to financial savings was 14.2 per cent in 2005-06, viz., 2.4 per cent of the GDP at current market prices. Development of the insurance sector is thus necessary to support continued economic transformation. IRDA Regulations provide certain minimum business to be done - in rural areas in the socially weaker sections Life Insurance offices are spread over nearly 1400 centres. Presence of representative in every tehsil deeper penetration in rural areas. Insurance agents numbering over 6.24 lakhs in rural areas. Policies sold in rural areas (2004-05) - No. of policies - 55 lakhs, Sum assured 46,000 crores. Social security - No. of lives cover Foreign direct investment

WHAT IS FDI?
Foreign direct investment(FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra-company loans". In a narrow sense, foreign direct investment refers just too building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. As a part of the national accounts of a country, and in regard to the national income equation Y=C+I+G+(X-M), I is investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given
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period. Direct investment excludes investment through purchase of shares.[3] FDI is one example of international factor movements

Importance and Barriers to FDI

The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950. While the quality of the data from 1950 may be of question, taking the average across a range of estimates confirms this. Only war-torn and countries with other serious external problems, such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita.

What is FII?
FII stands for Foreign Institutional investor. It refers to a company or an institution established outside India who makes an investment in the financial markets of India in the form of securities. The Indian stock market was open to the foreign investors on September 1992. Indian Market is growing very rapidly which makes India as one of the most important destination for the foreign investors. In general, the investors prefers to invest in sectors like the banking, construction and IT companies. One attractive point of this investment is that the sum deposited by these foreign investors can be withdrawn from the market at any time by the investor.

Definition of Foreign Institutional Investor - FII'

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.
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The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies DIFFRENCE BETWEEN FDI AND FII Government to classify foreign direct investments, foreign institutional investors based on their holdings in a firm. The country will now follow global practices to differentiate between foreign institutional investors (FIIs) and foreign direct investment (FDI) based on their holdings in firm. Foreign investors with less than 10% stake in a particular stock will be considered as FII, and more than 10% stake as FDI. As a result of the new classification, Indian companies will be required to make changes in their foreign shareholding structures. Of the 5,500 firms listed in India, 586 have FDI holdings and 1,317 FII holdings, including those that have holdings from both FDI entities and FIIs. FDI refers to an investment made by a company or entity based in one country, into a company or entity based in another country. The investing company may make its overseas investment in a number of ways - either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company, or through a merger or joint venture. An example of FDI would be an American company taking a majority stake in a company in India. The term FIIs refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market
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regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies. The Budget announced several measures to attract foreign investment in the form of simpler uniform registration process for different class of overseas portfolio investors, easier access for central banks, sovereign wealth funds and university funds to invest in India and allowing their entry into exchange-traded currency derivatives market. Broadly speaking, FDI entities are considered promoter group shareholders in companies, and FIIs public shareholders, because of the way these are governed and registered under the existing guidelines. FDIs are allowed to conduct private transactions while FIIs are not. FDIs attract up to 40% tax and are bound by lock-in periods in their investments as promoters. On the other hand, FIIs attract 30% tax. Various steps to attract foreign investors are aimed at tackling the growing current account deficit, which he said, could be addressed only three ways: FDI, FIIs or external commercial borrowings (ECBs). How does the Indian government classify foreign investment?

The Indian government differentiates cross-border capital inflows into various categories like foreign direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) and person of Indian origin (PIO) investment. Inflow of investment from other countries is encouraged since it complements domestic investments in capital-scarce economies of developing countries, India opened up to investments from abroad gradually over the past two decades, especially since the landmark economic liberalization of 1991.

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Apart from helping in creating additional economic activity and generating employment, foreign investment also facilitates flow of technology into the country and helps the industry to become more competitive.

Why does the government differentiate between various forms of foreign investment?
FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. Direct investment targets a specific enterprise, with the aim of increasing its capacity/productivity or changing its management control. Direct investment to create or augment capacity ensures that the capital inflow translates into additional production. In the case of FII investment that flows into the secondary market, the effect is to increase capital availability in general, rather than availability of capital to a particular enterprise. Translating an FII inflow into additional production depends on production decisions by someone other than the foreign investor some local investor has to draw upon the additional capital made available via FII inflows to augment production. In the case of FDI that flows in for the purpose of acquiring an existing asset, no add it Moreover, FDI brings not just capital but also better management and governance practices and, often, technology transfer. The know-how thus transferred along with FDI is often more crucial than the capital per se. No such benefit accrues in the case of FII inflows, although the search by FIIs for credible investment options has tended to improve accounting and governance practices among listed Indian companies. According to the Prime Minister's Economic Advisory Committee, net FDI inflows amounted to $8.5 billion in 2006-07 and is estimated to have gone up to $15.5 billion in 07-08 . The panel feels FDI inflows would increase to $19.7
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billion during the current financial year. FDI up to 100% is allowed in sectors like textiles or automobiles while the government has put in place foreign investment ceilings in the case of sectors like telecom (74%). In some areas like gambling or lottery, no foreign investment is allowed. According to the government's definition, FIIs include asset management companies, pension funds, mutual funds, investment trusts as nominee companies, incorporated/institutional portfolio managers or their power of attorney holders, university funds, endowment foundations, charitable trusts and charitable societies. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. The government allows greater freedom to FDI in various sectors as compared to FII investments. However, there are peculiar cases like airlines where foreign investment, including FII investment, is allowed to the extent of 49%, but FDI from foreign airlines is not allowed.

What are the restrictions that FIIs face in India?

FIIs can buy/sell securities on Indian stock exchanges, but they have to get registered with stock market regulator SEBI. They can also invest in listed and unlisted securities outside stock exchanges if the price at which stake is sold has been approved by RBI. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company, unless the Indian Company raises the 24% ceiling to the sectoral cap or statutory ceiling as applicable by passing a board resolution and a special resolution to that effect
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by its general body in terms of RBI press release of September 20, 2001 and FEMA Notification No.45 of the same date. In addition, the government also introduces new regulations from time to time to ensure that FII investments are in order. For example, investment through participatory notes (PNs) was curbed by SEBI recently.es place as a direct result of the FDI inflow.

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FDI IN INSURANCE SECTOR- A WELCOME STEP

In order to curb the trend of falling Foreign Direct Investment (FDI) in the country, government recently increased the FDI limit in various sectors, latest being the insurance sector. The need for larger FDI exists because India is at a stage where it needs not just investments, but also technology, and management policies to sustain and enhance its economic growth. The latest decision to increase the FDI cap to 49 percent in insurance sector received mixed reactions from various sectors, for obvious reasons, was opposed by the employees of public sector insurance companies. Insurance industry, suffering from muted growth and undergoing consolidation, needs a major breather in the form higher investments. According to Insurance Regulatory and Development Authority (IRDA), insurance sector requires big investments for growth and may attract Rs 30,000 crore that the industry requires over the next five years. Unless FDI cap is raised from 26 percent to 49 percent, the industry will not have the required capital to underpin the growth of the insurance industry. Moreover, when 74 percent FDI is allowed in the banking sector, 100 percent in Asset Management Companies, just 26 percent FDI is unjustified. Currently, there are 24 players in the life insurance industry, including 22 joint ventures with foreign participation to the extent of 26 per cent. ICICI Lombard has Fairfax Financial a Canadian company as 26 percent partner, HDFC Standard Life has Standard Life Plc a UK based company, MaxBupa Health Insurance Company is a joint venture between Max India Limited and Bupa Finance plc UK, IndiaFirst Life Insurance is a joint venture between two of

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India's public sector banks: Bank of Baroda (44 percent) and Andhra Bank (30 percent) and UKs financial and investment company Legal & General.

IMPACT OF FDI ON INSURANCE SECTOR:

The table-1 given below provides the numerical data of the selected life insurance companies premium Growth year wise, yearly premium invested by customers in life insurance companies. In the year 2002-03 public companys (LIC) was collected 546228.49 cr. in the comparison with five selected private sector companies there were total collection 733.52 cr. we can discus in the year 2004-05 while total significant collection of public company was 75127.29 and in a comparatives with selected private companies there were total collection of premium around 4402.29 cr. In the year 2007-08 while total collection of public companies was 149789.99 cr. and selected private companies there were total collection of premium 27979.99 cr. In during the last session 2009-10 public company has been collected total premium around 1,85,985, its comparison of selected private companies, there were total collection of premium 16,495.86 cr. The huge premium collection have increased every financial year that was gearing insurance business in India on fast pace.
Table-1: Selected life insurance companies collected premium growth year wise (Rs. in

Cr.)
Name Of The Life Insurance Co. LIC ICICI Pru. HDFC Std. SBI TATA AIG AVIVA 2002-03 546228.49 417.62 148.83 72.39 81.21 13.47 2004-05 7512728.29 2363.82 686.83 601.18 497.04 253.42 2007-08 149789.99 13561.06 4858.56 5622.14 2046.35 1891.88 2009-10 1,85,985 6334.31 1000.5 7040.66 1321.53 798.86

Source: - From IRDA Journals

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In the comparison of public companys (LIC) and selected private life insurance companies the given data revealing the impact of foreign direct investment in private sector companies not a bane, its boon for life insurance companies. In premium growth has shown their performance of business proliferation of selected private life insurance companies, they have been increasing their collection of premium investment every financial year.
Table-2: Market share of selected companies in (%). Market Sh. Name of Player LIC ICICI Pru. SBI Life HDFC Std. TATA AIG Aviva Other Total Source: - From IRDA Journals 78.78 5.6 1.80 1.36 1.29 0.79 10.35 100 FY 2004-05 74.39 8.93 6.12 2.88 2.53 1.25 3.89 100 Market Sh. FY 2004-05 64 11.8 6.2 7.4 3.3 2.5 3.9 100 Market Sh. FY 2004- 05

The above table-2, presents the resultant figure of the insurance companies and its market share that indicate the penetration of life insurance companies in Indian markets, such penetration indicate the fruitful growth and its positive result of utilization foreign investment in life insurance sector. The new players have improved the service quality of the life insurance. As a result have seen LIC continuing declining in its career from the year 2000 onward, market share have been distributing among the private players. In the financial year 2009-10, LIC still hold 65% market share among doing business of life insurance companies in India, for upcoming nature of these private players are gaining strength to give more competition to LIC in earlier future. Market share of LIC has decreased from 95 %( 2002-03) to 81% (2004-05), in the financial year

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2007-08 still hold 74.39% and following private players hold the rest of the market share. The table-3 given below revealing the profit and loss summary to the selected private life insurance companies which has been running insurance business since 2002.We have collected yearly annual report of their companies for the analysis it would be suffered gain or loss. The figure has taken from the selected year; they have revealed performance to the companies, they continuous increase loss every year all companies exception of LIC. ICICI prudential life insurance in the year 2007-09 increase loss (18, 37,285), in the year 2009-10 increase loss (10, 33,680), in comparison we have taken figure of SBI life insurance in the year 2005-07 increase loss(2, 415, 44) in the year 2007-09 the companies have reduce loss 80,751 from the corresponding year 2005-07, in the financial year 2009-10 the company has taken profit 2,548,743. In the comparison between public company and private life insurance companies, public company taking profit every financial year. In the opposite of selected private life insurance companies every financial year have gone downward in the exception of SBI life insurance such as that company in among show better performance in his track record to reduce loss and also taking profit.
Table-3: Profit and Loss of selected companies Name Of The Life Insurance Co. LIC ICICI HDFC Std. SBI Life TATA AIG AVIVA (1,878,181) (55,040) (1,794,004) (1,893,874) 2005 7736203 (16,016,980) (4,421,364) (296,584) (3,056,734) (4,650,081) 2007 2010 10,607,168 (35,184,918) (14,664,966) (16,098,612) (16,098,612) (15,072,628)

Source: - International Referred Research Journal, August, 2011. ISSN- 0974-2832, RNI-RAJBIL 2009/29954; VoL.III *ISSUE-31

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In the given table-4 show share holding pattern of entire selected private life insurance companies in which investment of foreign player in an Indian life insurance companies as well as a part of share investment by Indian promoters, they are revealing life insurance companies investment in Long term and Short term investment in a various sectors such as Government securities, Government bonds and other approved securities and other investment share, mutual fund, derivatives etc.
Table - 4: Share Holding Pattern

Invest in infrastructure, social sector and non convertible debentures. They are investing in Short term investment in Government securities, government guaranteed bonds including treasury bills others approved securities and others investment in share equity, preference share, investment other securities (term deposit) investment properties, real estate etc. for the purpose to enhance the financial position of insurer companies. Such income investment by policyholder into the insurance companies, companies as optimum utilization of all technique for investing income in various fund area. Where there to multiple of invested money, in their part 26% investment of foreign player and other local investors in India private life insurance companies. The selected life insurance companies in which the given part of percentage investing in insurer companies.

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Is Higher FDI Limiting In Insurance A Threat For Public Sector Insurers? The huge probability of the Insurance Laws (Amendment) Bill getting an
approval in the parliament during the winter session has started to increase the anxiety levels of Public Sector Insurers as they are already struggling to arrest the decline in their market share. Recently, Cabinet has cleared an important decision to increase Foreign Direct Investments (FDI) limit from 26 percent, capped in 1999, up to 49 percent in Indian insurance companies. During the last decade (2001-02 to 2011-12), the market share of the public sector insurers has decreased due to new entrants in the private sector. A Zee Research Group (ZRG) analysis reveals that Life insurance Corporation (LIC) has been struggling to maintain the market share in segments, life and non life, since 1999, when 26 percent FDI was allowed in the insurance sector. Public sector insurer, LIC, in its bread and butter segment (Life segment) has lost a significant market share from 98.65 percent in 2001-02 to 71.40 percent in 2011-12. On the other hand, during the corresponding period, the market share of private sector life insurers has increased from 1.35 percent to 28.6 percent. With regards to the market share of LIC in the non-life segment has decreased to 58.46 percent in 2011-12 from 95.91 percent in 2001-02. The massive potential in the Indian life and non-life insurance sector has encouraged large private financial services companies to form joint ventures with global insurers. Some of the prominent private players of this sector include the names of Bajaj Allianz, Birla Sunlife, ICICI Prudential, Tata AIG, HDFC Standard Life, Reliance Life, Max Life and so on. On the declining market share of public sector insurers, S B Mathur, former LIC Chairman, opined, Something has to happen when 24 private players are doing business in the insurance sector. Increase in FDI limit can lead to greater
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penetration of retail market. Consequently, the general and non-life public sectors insurers could feel the rub-off effect mainly due to the cut throat competition from the private players in the country. Mathurs thought got an endorsement from N S R Chandraprasad, Chairman and Managing Director, National Insurance Company (NIC), who averred, FDI in insurance will be the threat for the public sector companies because the growth in the numbers of private players will affect the market share of public sector insurers in the country.

THE NEED FOR RAISING FDI LIMIT Reforms in Insurance sector was started in India way back in 1993 as a part of overall financial reforms. The main idea was to make insurance industry vibrant and dynamic so that it can support the growth process leading to overall economic growth of the country in post liberalization era. At present the foreign direct investment in insurance sector is permitted up to 26 per cent of equity. Higher amount of Foreign Direct Investment (FDI) in insurance sector would increase penetration of insurance in India as existing companies will try to expand their reach and new companies making entry into the market will work for their space in the market. Higher amount of FDI is likely to enrich the business by bringing world class business practices and process. Simultaneously it would help expand distribution capabilities. It is proposed therefore to raise FDI limit from existing 26% to 49%. This will help the insurance industry in the following ways.

1. Higher FDI in insurance sector can give much needed capital for growth of insurance sector which in turn will help in the long term economic development. 2. Ambitious infrastructure projects of Government can get stable long term source of funds.
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3. Higher amount of FDI in insurance would increase penetration of insurance in India which is low compared to global average. 4. An increase in FDI in insurance will benefit the economy as people will invest in long term fund which will increased the growth of economy. 5. Insurance in India is mainly confined to urban sector Vast potentials are lying untapped in rural India. For accessing into these areas new approach is necessary in the matter of product design, pricing and product delivery mechanism. As far as rural health is concerned there are many new entrants waiting for making entry into the market, considering huge potential. Private players may tap these potentials. Thus raising of FDI limit in insurance sector will strengthen the market and thus lead to the economic growth of the country.

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ADVANTAGES OF FDI IN INSURANCE SECTOR

1. Capital for expansion: FDI has the potential to meet Indias long term capital requirements to fund the building of infrastructures which is critical for the development of the country. Infrastructure has been the major factor which has restricted the progress of the Indian economy. Insurance sector has the capability of raising long term capital from the masses as it is the only avenue where people put in money for as long as 30 years even more. An increase in FDI in insurance would indirectly be a boon for the Indian economy, the investments not withstanding but by making more people invest in long term funds to fuel the growth of the Indian economy. 2. Wider Scope for Growth: FDI in insurance would increase the penetration of insurance in India, where the penetration of insurance is abysmally low with insurance premium at about 3% of GDP against about 8% global average. This would be better through marketing effort by MNCs, better product innovation, consumer education etc. 3. Moving towards Global Practices: Indias insurance market lags behind other economies in the baseline measure of insurance penetration. At only 3.1%, India is well behind the 12.5% for the UK, 10.5% for Japan, 10.3% for Korea and 9.2% for the US. Currently, FDI represents only Rs.827 core of the Rs.3179 crore capitalizations of private life insurance companies. 4. Provide customers with competitive products, more options and better service levels: Opening the FDI in the insurance sector would be good for the consumers, in a lot of ways. Increasing FDI limit would impact a lot of industries in a positive way and that we could even do without the FDI in many other sectors for some for example in real estate. 5. According to the experts, the benefits of all kinds of FDI investments are likely to be seen only in the future. FDI and its results is a long term process and it will reap the benefits after a few years of initiating it. More
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and more key players on global insurance market will make their debut in the very active Indian insurance market. Present foreign companies will increase their shareholding, benefiting the investors all the more. 6. Indian insurance sector, especially the life insurance sector is totally dominated by the government owned insurance company - Life Insurance Corporation, General Insurance Corporation and several of its subsidiaries. However, with the increased percentage of FDI various private insurance companies are likely to benefit the most. These companies include Max, Reliance Life, Aegon Religare, Birla Sunlife, etc. But the companies like Bajaj Allianz are likely to benefit less due to their previous agreement that allows their partner to increase their stakes at predefined prices. 7. Companies which require huge amount of capital, at the operational level, foreign joint-venture partners are already very involved in the industry and they bring the product and risk-related expertise. Generally, such arrangements have worked well. Along with bringing capital for future growth, FDI will bring a degree of comfort to the foreign partner.

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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.

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ISSUES IN FDI IN INSURANCE SECTOR:

1. Efficiency of the companies with FDI: The opening up of this sector for private participation in 1999, allowed the private companies to have foreign equity up to 26 per cent. Following this up 12 private sector companies have entered the life insurance business. Apart from the HDFC, which has foreign equity of 18.6%, all the other private companies have foreign equity of 26 per cent. In general insurance 8 private companies have entered, 6 of which have foreign equity of 26 per cent. Among the private players in general insurance, Reliance and Cholamandalam does not have any foreign equity. The aggregate loss of the private life insurers amounted to Rs. 38633 lakhs in contrast to the Rs.9620 crores surplus (after tax) earned by the LIC. In general insurance, 4 out of the 8 private insurers suffered losses in 2002-03, with the Reliance, a company with no foreign equity, emerging as the most profitable player. In fact the 6 private players with foreign equity made an aggregate loss of Rs. 294lakhs. on the other hand the public sector insurers in general insurance made aggregate after tax profits of Rs. 62570 lakhs. 2. Credibility of foreign companies: The argument that foreign companies shall bring in more expertise and professionalism into the existing system is debatable after the recent incidents of the global financial crisis where firms like AIG, Lehman Brothers and Goldman Sachs collapsed. Earlier too, The Prudential Financial Services (ICICIs partner in India) faced an enquiry by the securities and insurance regulators in the U.S. based upon allegations of having falsified documents and forged signatures and asking their clients to sign blank forms. This was after it made a payment of $2.6 billion to settle a class-action lawsuit attacking wrong insurance sales practices in 1997 and a $ 65 million dollar fine from state insurance regulators in 1996. AMP closed its life operations for new business in June 2003. Royal Sun Alliance also shut down their profitable businesses in
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2002. A recent report by Mercer Oliver Wyman, a consultancy, found that European life insurance companies are short of capital by a whopping 60 billion Euros. According to the Mercer Oliver Wyman Report the German, Swiss, French and British insurers suffer from severe capital inadequacy, which is a result of undertaking risky investments in equity and debt instruments in the past. Hence FDI in Insurance in India would expose our financial markets to the dubious and speculative activities of the foreign insurance companies at a time when the virtues of regulating such activities are being discussed in the advanced countries. 3. Greater channelization of savings to insurance: One of the most important duties played by the insurance sector is to mobilize national savings and channelize them into investments in different sectors of the economy. However, no significant change seems to have occurred as far as mobilizing savings by the insurance sector is concerned even after the liberalization of the insurance sector in 1999. Therefore the private or foreign participation has not been able to achieve the goal. 4. Flow of funds to infrastructure: The primary aim of life insurance is about mobilizing the savings for the development of the economy in long term investment in social and infrastructure sectors. The same vision was argued for the opening up of insurance market would enable huge flow of funds into infrastructure. But more than fifty percent of the policies they sell are ULIPS where the investments go into the equity markets. As per a report, 95% of policies sold by Birla Sun Life and over 80 percent of policies sold by ICICI Prudential were unit-linked policies during 2003-04. Under these schemes, nearly 50 percent of the funds are invested in equities thus limiting the fund availability for infrastructural investments. On the other hand, the LIC has invested Rs.40,000 crore as at 31.3.2003 in power generation, road transport, water supply, housing and other social sector activities. IRDA figures further imply that the share of the public
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sector life and non-life insurance companies in investment in infrastructure is greater than their market share. 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. Hence the point of raising the FDI cap in the insurance sector for mobilizing resources does not hold good.

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CONCLUSION Evaluation to the relevant data number of selected working private life insurance companies in India, lacking behind from financial strength its needs more FDI for business expansion. But we have found all the selected private life insurance companies growing his business growth and its life insurance business expanding urban, semi urban and rural areas. The foreign direct investment (FDI) is not a reverse impact on the working private life insurance companies business in India, but it assist for infrastructure development, assist in better facilities and techniques for sales person, broker etc. The private sector companies hajs been breaking market share of public company since 2000 to onward, the penetration strength of private life insurance companies greater than the public companys(LIC) such as development of infrastructure, they have been opening more new branch office in rural areas, tapping niche markets for business growth these are ultimately a profit solution. The outlook for the general insurance industry in India is stable based on steady fundamental credit conditions in the sector over the next 12-18 months. With the Indian economy forecast to grow at 9% in 2010 and given rising income levels and higher risk awareness among insured, the countrys insurers are optimistic about demand for their products. However, intense competition from new entrants, deregulation and a moderation in returns from the equities market will pressure pricing and ultimately short-term profitability. At the same time, despite rising inflation and a severe correction in the stock market, the prevailing view in Asia is that while China and India are not insulated from the credit crisis afflicting the US and EU, domestic demand is strong enough to support GDP growth. But until the existing insurance players show substantial benefits or it addresses the issues at hand, there would not be much of value addition to the country.

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BIBLIOGRAPHY
IRDA The journal insurance institute of India, Jan-June 2009. pp 48-52, 69-73. Magazine Money Outlook Business India economic and political weekly Nov 29, 2010. pp 95Money and Markets Nov, 2009 Business Line Published on Sat, Nov 21, 2009 The Financial Express Tuesday Dec 14, 2010 and Monday, Dec03, 2007 The Economic Times, Sept. 21, 2008. Financial Chronicle, 20-Aug-2009 The Hindu Business line. Hopes on hike in FDI Dec,2008 The Hindu Business line The Hindu group of publications Saturday, Apr 18, 2009 Broachers http://www.asianinsuranceveiw.com http://www.economictime.indiatime.com http://www.businessstandard.com http://www.thehindubusinessline.com http://www.hdfcinsurance.com http://www.irda.gov.in httpp://www.insuranceicai.org http://www.iloveindia.com http://www.managementparadise.com http://www.irdainia.com http://www.lloyds.com With a huge population of 1.3 billion and low insurance penetration, India is a relatively large market for these insurance companies. Even a subdued 5-6 per cent GDP growth in India is preferable to almost negligible growth in most of the western economies. Though foreign insurance players have been present in India for almost more than a decade and despite the double-digit growth, the sector is yet to witness the expected vibrancy and infusion of innovative products. One of the key factors is limited inflow of investment by foreign players due to cap on foreign direct investment (FDI) of 26 per cent. To make their investments in India relevant and worthwhile, most of the foreign players are looking forward to increase their share in their respective Indian ventures.
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Recent proposal by government of India to hike FDI ceiling from 26 per cent to 49 per cent is the next logical and expected step. Life premium has grown at a CAGR of over 23 per cent during last decade and, is expected to grow at 15 per cent over next decade. This is bound to fuel demand for new products, new intermediaries and additional capital. There are various factors that will drive growth in the Indian Insurance market, some of the key drivers are: Growth Drivers Rising income & growth of middle class Post liberalization reforms and

growth in service sector has significantly increased the purchasing power of people. The income pyramid is changing with a large number of families entering into higher income group and much more families moving into middleincome group. Currently out of over 247 million households, 75 per cent comprises the humongous middle class. This would create new pockets of fresh demand for affordable and innovative insurance products and services. Societal changes and urbanization

It's anticipated that by 2031, 40 percent of Indian population will reside in urban centers and there would be at least 10 cities with a population more than 140 million. This rapid urbanization and fast paced economic growth has significantly altered the family structures. The concept of joint family is fast diminishing in India, especially in urban India where during the last two decades average size of family has reduced to four from six. This trend will continue further where there is negligible dependency on extended family, more and more families are going nuclear way. As such these families would be increasing looking for adequate risk cover which in turn will further drive the demand for new insurance products and services. Financial Sophistication
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India has oldest stock market in Asia and the financial services market is quite evolved and relatively stable. In the recent years consumers are getting more comfortable in doing online business and are rapidly adopting internet as a way to do financial transactions. Riding on the success of online banking and ecommerce, Insurance companies are also exploring to leverage the online platform to reach and acquire new customers. While the companies can have a low acquisition cost, the prospective customers now have an improved access to information about various insurance products and services. Such information abundance and ease to buy insurance cover online would further increase the insurance penetration in India. implications of FDi At the end 2011, level of FDI in Insurance is pegged at INR 68bn, with FDI in Life Insurance and General Insurance at INR 57bn and INR 11bn respectively. It is estimated that after new ceiling of 49 per cent, this will increase six fold to INR 400bn by year 2020.Such a quantum jump in foreign direct investment would have fairly wide and far reaching implications on overall Indian economy. Insurance is the only sector where people invest money with a long term view. Therefore, growth in insurance sector would promote long term investments especially in infrastructure sector. Infrastructure has become a big bottleneck in India growth story, long term funds would go a long way in alleviating the funding issues of this sector. Moreover, multiplier effect of infrastructure upgrade can boost other sectors of the economy too. implication for insurance sector Smart capital moving into insurance sector would expand the market by increasing insurance sectors reach and depth. Infusion of such smart capital will aid companies to expand their network by covering new geographic areas
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and bringing uninsured under the net. This growth in network will also result in increase in intermediaries and agents thus generating multitude of employment opportunities across the sector.In order to woo new customers and increase their share of wallet from existing customers, companies have to offer latest and innovative products and services. This capital would also enhance the risktaking appetite and would promote long-tailed products in the market. Flow of foreign funds will also be accompanied by transfer of world class know how and technical expertise. These changes would further drive the competition among companies and in general make the sector more vibrant. From customer point of view, increased competition will result into wider variety of products at a better price.On the life side, it would positively impact the new players and players that are yet building their portfolios. This capital infusion would help them to introduce new products and write more policies. Already established and existing players may not benefit much from FDI and at the same time they would have to be ready to handle more competition. In general insurance, the sector may see advent of new companies launching new innovative and low priced products. This would also result in development of new channels, intermediaries and increased usage of web based platforms to reach new customers. Existing players would have to redefine and refine their pricing strategies to overcome the increased competition. While the sector is going to witness increased competition and rise in underwriting of new policies, players would have to tighten their belts and prime up their risk management practices and underwriting guidelines. Increasing the FDI ceiling will make the Indian Insurance sector more vibrant and dynamic in the intermediate and long term. Increased competition coupled with wider variety of products will result into a healthy Industry. Insurance companies and other players have to gear-up and plan now to reap the future benefits.
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