FDI and Economic Development

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Introduction
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.

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15

14

Column1

20

Public Sector

10

5

6
1

1

0
Life Insurance

General Insurance

Re Insurance

Source: Insurance Regulatory & Development Authority Official Website
www.irda.org
Fig 1. India’s Insurance Industry at a Glance
Foreign Direct Investment as seen as an important source of non-debt inflows, and
is increasing being sought as a vehicle for technology flows and as a means of
attaining competitive efficiency by creating a meaningful network of global
interconnections.
FDI plays a vital role in the economy because it does not only provide opportunities
to host countries to enhance their economic development but also opens new vistas
to home countries to optimize their earnings by employing their ideal resources.
India has sought to increase inflows of FDI with a much liberal policy since 1991
after decade's cautious attitude. The 1990's have witnessed a sustained rise in

annual inflows to India. Basically, opening of the economy after 1991 does not live
much choice but to attract the foreign investment, as an engine of dynamic growth
especially in view of fast paced movement of the world forward Liberalization,
Privatization and Globalization.
FDI in Insurance Sector
Insurance is a capital-intensive industry. It is also a long-gestation business. In
countries like India, insurance industry is in great need of capital primarily
attributed to the following reasons1. Premiums rates remain under pressure due to intense competition on more
profitable lines. Falling premium income without a corresponding reduction in
claims is driving down profits.
2. Public and private sector insurers’ greater reliance on their investment
portfolios to generate sufficient income and gains for net profits subjects
them to the volatility of the financial markets.
3. Private insurers need to raise more capital otherwise growth could be
constrained since reliance on reinsurance for capital relief is not always
viable or available.

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