Safeguards please

It is well understood that the insurance sector in India mostly caters to the well-off and not to the really needy. Most people are covered by private sector companies or the government-run Life Insurance Corporation. The government’s decision to increase foreign direct investment in India from 26 to 49 per cent will have some measurable impact, because the hike will be a composite one. This means that foreign capital can flow either as direct investment or via the portfolio route, or as a combination both. Therefore foreign investors can either directly buy equity from the company or buy shares on the stock market. The insurance sector is very cash intensive in its general make-up that needs a lot of capital infusion. According to the government, hiking FDI will help all those new and small companies who are struggling for growth, thereby enhancing competition. News reports have suggested that the bill could result in immediate inflows of up to Rs 20,000 crore with the increase in FDI cap. Consequently, companies will have enough chances to bring in new technologies and products to the insurance market, which was not available under the earlier cap. Insurance customers under the private sector will definitely benefit from the increase in FDI. Fortunately, as a means of protecting the consumer, the bill has stated management must remain with India companies and the companies will have to go for approval of the Foreign Investment Promotion Board (FIPB) for investments over 26 per cent. However, the government must ensure that this clause remains intact. Sometimes foreign investors wrest control and exploit loopholes in the policy by registering shell corporations. As a mater of policy, strict regulation and accountability must be the order of the day.  However, when it comes to the question of poverty alleviation, there is very little that FDI in the insurance sector could facilitate. The rural poor would not be able to pay the sort of premium that foreign investors seek, considering the high cost of risk. If foreign investors were to come into the insurance sector they would look at individuals who can at least pay some minimum sort of premium to encourage them to invest. The risk involved in insuring a poor man, who is bereft of any infrastructural mechanism to back him up, will be rather high and consequently the premium.