India’s insurance industry is about to undergo a considerable evolution after the government’s landmark proposal to increase foreign direct investment (FDI) from 74% to 100% in the insurance sector (proposed amendment). This proposed amendment, announced in the Union Budget 2025, aims to attract more capital into the long-term, capital-intensive sector, ensuring insurers invest all collected premiums within India.
India’s insurance sector is forecasted to grow at a CAGR of 12-15% over the next decade, becoming one of the fastest-growing industries in the country. With the FDI initiative, India can expect to see rapid and large inflows of foreign capital, the social well-being of citizens profusely increased, and a revolution of sorts in the Indian insurance system.
How Will 100% FDI Reshape the Insurance Industry?
The removal of foreign ownership restrictions is expected to have a wide-ranging impact on the insurance industry, affecting both domestic and foreign players.
The Indian insurance sector has attracted significant FDI, receiving 62% of the $5.7 billion equity inflows into the services sector from April to September FY25, according to the Economic Survey 2024-25. If the proposed amendment is made, these figures are expected to skyrocket as international insurance companies would enter the Indian market with huge capital investments.
This capital infusion will enable insurers to expand, create customized products suited to the Indian market, and improve service quality. Foreign companies, previously deterred by ownership caps, can now establish wholly owned insurance firms.
The proposed amendment also aims to align with India’s “Insurance for All by 2047” initiative that was launched by the Indian Government and the Insurance Regulatory and Development Authority of India (IRDAI). This initiative focuses on increasing insurance access, especially in underserved and rural areas, to promote financial inclusion.
Regulatory and Legislative Changes Required
The implementation of the proposed amendment would require several regulatory and legislative amendments.
- Amendment to the Insurance Act, 1938
The Insurance Act, 1938 would have to be amended to officially increase the FDI limit. The bill will need to be passed in both houses of Parliament before receiving the President’s assent. A similar process was followed in 2021, when the FDI limit was raised from 49% to 74%, and it took approximately six months for the changes to be implemented.
- Changes to IRDAI Regulations
The proposed amendment will necessitate corresponding amendments to both the Insurance Act and IRDAI regulations, especially the Indian Insurance Companies (Foreign Investment) Rules, 2015 and the Insurance Regulatory and Development Authority of India (IRDAI) (Registration, Capital Structure, Transfer of Shares and Amalgamation of Insurers) Regulations, 2024. At present the regulation states that insurers with foreign investment are required to have:
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- majority of directors as resident Indian citizens;
- majority of Key Management Personnel (as defined by the IRDAI) shall be resident Indians; and
- at least one resident Indian shall occupy the position of either Chairperson, Managing Director or CEO.
For insurers with FDI of greater than 49%, there are additional provisions that require the board to have a majority of independent directors and, if paying dividends, while maintaining solvency below 1.2 times the control level, must retain 50% of profits in general reserve. All of these existing requirements are assumed to remain in force in the new 100% FDI regime, and given current practices within the industry, this compliance should not present any major challenges for insurers.
- Foreign Exchange Regulations
The government will also need to amend the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, to facilitate 100% foreign ownership in the insurance sector.
Potential Challenges and Risks
Although the updated FDI policy presents great possibilities, it will also pose certain challenges that must be addressed:
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- Uncertainty about Regulation – Clarity is needed around the structure of governance and compliance requirements for new foreign entrants.
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- Competition with Domestic Insurers – Domestic competitors may find it difficult to compete with international insurers that have better financial resources and technology.
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- Indian Partners Exiting Joint Ventures – Many existing joint ventures would see their Indian partners leave, as multinationals opt for full ownership.
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- Consumer Awareness – Despite more access to insurance, there is very low insurance literacy in India. More needs to be done to develop education about insurance and insurance benefits.
Conclusion
The approval of 100% FDI in insurance marks a major liberalization in India’s financial sector, transitioning from nationalization to full liberalization with safeguards. This reform is expected to attract significant capital, enhance competition, and improve practices in product development and customer service. Global insurers will bring advanced expertise, increasing insurance accessibility and affordability, especially for rural areas and MSMEs. This aligns with India’s goal of ‘Insurance for All by 2047’ and becoming a financial hub. Despite regulatory and cultural challenges, the reform has the potential to elevate insurance penetration, create jobs, and serve as a model for other emerging economies.