100 percent FDI in Insurance Broking — Understanding the Prospective Implications The Silver Jubilee of India-ASEAN Relations: A Geopolitical Rejuvenation

The year 2000 witnessed liberalization of the Insurance Sector and has undergone significant changes over the last two decades. The Insurance Regulatory and Development Authority of India (IRDAI) has brought policy and regulatory interventions from time to time to keep pace with the global industry trends. Be it the introduction of intermediaries such as brokers, surveyors, insurance marketing firms, web aggregators, third party administrators; or an increase in the Foreign Direct Investment (FDI) cap from 26 to 49 percent for insurance companies, all these are important milestones for the industry.

Globally, two very widely used indicators for the insurance industry are insurance penetration and insurance density. While the former means the total amount of insurance premiums as a percentage of GDP, the latter one is defined as per capita premium or premium per person. As per the latest Swiss Re World Insurance Report 2018, India ranks 41 globally in insurance penetration. Our overall life insurance penetration is 2.76% while non-life insurance penetration is 0.93%, overall resulting in 3.69%, which is very low from the world average of 6.13. Talking about insurance density, India stands on 73rd globally. Our life insurance business density is US$ 55 while the non-life insurance density amounts to only US$ 18, this is well below the global average of US$ 353 and US$ 297 for life and non-life insurance businesses respectively.

According to Annual Report of IRDAI  by March 2018, there were 68 insurers operating in India; of which 24 are life insurers, 27 are general insurers, 6 are standalone health insurers exclusively doing health insurance business and 11 re-insurers including foreign reinsurers branches and Lloyd’s India. The India Brand Equity Foundation (IBEF) suggest that gross premiums written in India reached Rs 5.53 trillion (US$ 94.48 billion) in FY18, with Rs 4.58 trillion (US$ 71.1 billion) from life insurance and Rs 1.51 trillion (US$ 23.38 billion) from non-life insurance. These numbers do seem to present a flourishing picture for the industry. An Assocham report had said that the Indian insurance industry is expected to grow to US$ 280 billion by 2019-20. However, if we compare it with the global scenario then a lot needs to be done. The recent move of the Government, announced in the latest budget, to increase FDI capping for insurance intermediaries from 49 to 100% suggest the same.

It is interesting to look at the growth of other financial products in a similar timeframe. For example, Sensex was around 3000 during 2001 and now it is around 13 times bigger hovering around 40000.  Although its penetration is also around just 2.5% of the population only. But, the growth of new customers for stocks in Tier 2 and 3 towns is increasing rapidly. For that matter, even the insurance density is also increasing. However the major difference between insurance and any other financial product is that the more the insurance distribution is spread, the more the risk is shared among many, hence the insurance penetration is much important for the economy. Though the Government schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY)Ayushman Bharat – Pradhan Mantri Jan Arogya Yojana (PM-JAY)Pradhan Mantri Fasal Bima Yojana (PMFBY) can give a good exposure for insurance schemes, it remains in the hands of the insurance sector strategies on how to capitalize the exposure for add on risk coverages. For example, the statistics of dormant bank accounts of Jan Dhan is not much encouraging which means that mere exposure cannot contribute to the growth but active participation will do. Further, Jan-Dhan se Jan Suraksha under the Jan Dhan is not getting the desired traction.

Let’s keep aside the financial sector for a while and let’s discuss the e-commerce and consumer internet sector.  Be it food delivery, retail or hospitality, startups like Zomato / Swiggy, Amazon / Flipkart, Paytm, Oyo have received great success. Their success model is based on two key factors; one their strong distribution channel for their services that dives deeper into even small cities of India with similar thrust as it does in metros and another key factor would be efficient customer service. It is to be noted that while some of these startups are yet to generate profits but it is intriguing that despite that, these are valued in billions of dollars just because of their impeccable customer service, capability to reach and deliver and fulfill the requirement of the customers by making them aware of all the options and providing choice.

Let us come back to the insurance sector and explore and understand the prospective implications and outcomes of 100% FDI in insurance intermediaries and specifically in insurance broking as announced in the budget:

The distribution of insurance is still dominated by individual and corporate agents (around 90%) in the life insurance side. Brokers are still hovering only with 1% of the business. For example, in 2017-18, as per IRDAI reports, Individual agents have contributed around 2.5 crores of policies, while brokers have contributed only 2.3 lakhs of policies which shows the degree of influence of brokers. However, on the general (non-life) insurance side, almost 25% of the business is done through brokers.
According to the ‘Vision 2025: brokers driving customer-centric growth’ report of the Insurance Brokers Association of India (IBAI), direct selling and corporate agencies are the most common distribution channels for selling insurance. Further, channels like bancassurance, online distribution, and NBFCs have helped the industry to grow as well. But if we talk about broking, then it is preferred by a very limited number of clients, mostly corporates. The report says “In non-life insurance, broking contributed 23.2% of gross direct premium in FY15 and the channel has registered a CAGR of 27.6% between FY10 and FY15. However, in life insurance, broking contributes only 1.3% of new business premium; the channel is more significant for private life insurers – 4% contribution — as compared to no contribution of broking for LIC.”
Based on these facts, one can perceive that the industries or businesses are inclined towards brokerage firms when it comes to insurance for businesses, but individual policies are highly influenced by individual agents.
There is no dearth of insurance companies or the products that don’t fit the needs of the Indian customers. Insurance products can be customized as per the needs of the customers. But in order to reach them and understand their needs, it is important to strengthen the distribution channels and this step to allow 100% FDI in intermediaries will certainly help the cause.

According to IRDAI, there are over 400 brokers/broking firms registered with them in India, as on 30th June 2018. This comprises of direct (368), composite (60) and reinsurance (5) brokers. According to a report in the Indian Express“Currently, the insurance broking industry deals with over Rs 30,000 crore of premium primarily from the non-life industry which generated over Rs 170,000 crore of premiums in 2018-19”. According to IBAI’s Vision 2025, a considerable chunk of brokers/broking firms in India are located in the top 4-5 states and corporates are the major clients of the brokers with 40–50% of their businesses. Clearly suggesting that brokers have confined areas of operation and vast opportunity to scale up in the future. Therefore, FDI will result into the capacity and expansion of broking firms in India that might enable the growth of broking business in smaller towns and tap other clients as well apart from corporates and focus on the rural, retail and SME segment. With technology-led initiatives, brokers can taste good success here.

The report further mentions that 6 out of the top 10 global brokers are not present in India. With this move, these giant brokers might pave their way into India. Foreign players will also bring new technologies and data analytics tools in the broking industry, these will surely help in devising strategies for better sales, customer behavior identification & targeting, product improvement based on analysis of feedback from the customer, etc; Data analytics is the way forward for sure. It is to be noted that there is no limit on insurance intermediaries in mature markets such as the UK, Australia or emerging markets such as Mexico and Vietnam, according to the IBAI report.

While 100% FDI might yield good results, there are few discouraging implications as well. The insurance broking market is highly competitive and thus with the entrance of global broking giants – it could get difficult for small & medium-sized local brokers to survive. These bigger firms with the strong financial backing and new technology support might just kill the businesses of existing small/medium brokers or acquire them.
While the move will facilitate the growth of the insurance broking industry in India; it is imperative for local brokers to understand they have a much larger role to play in the industry. At present, it is common perception and the majority of brokers are treated as mere price discoverers, which is hindering their growth. It is for us to learn from the global peers and improve client servicing by offering claims management, risk management, insurance consulting, market knowledge, etc;  because unless local brokers improve their game and diversify their service offerings, sooner or later they will be eaten up by bigger players. Thus up-skilling and value addition is the key for the broking industry to grow and play a crucial role.
Talking specifically about insurance broking, the allowing of 100% FDI can lead to a good revolution to invest more in the research for smarter delivery of insurance products, insurance awareness and education using the advantages of contemporary internet cultures, attaining the goals of infusing technology, efficiency, access to customers, service level benchmarking and competition. It is also important to note that a new wave of capital flowing into insurance broking should set new professional standards in the corporate salesforce set up, making the insurance sector more accountable and transparent.
About the Authors:
Dr. S. Jayaprakash – Impact and Policy Research Institute (IMPRI), New Delhi.
Mahesh Talreja – He is a Strategic Consultant with Impact and Policy Research Institute (IMPRI), New Delhi.

Dr. Arjun Kumar – He is the Director of Impact and Policy Research Institute (IMPRI), New Delhi. He holds a Ph.D. in economics from the Centre for the Study of Regional Development, School of Social Sciences, Jawaharlal Nehru University (JNU), New Delhi.
Article Published On Indrastra


  • Ritika Gupta

    Ritika Gupta is a senior research assistant at Impact and Policy Research Institute. Her research Interests include Gender Studies, Public Policy and Development, Climate Change and Sustainable Development.