By eliminating foreign shareholding caps, policymakers hope to draw major international insurers capable of injecting fresh capital, deploying advanced risk management, and introducing innovative products.
Liberalization has proved to be a good enabler for insurance penetration both in India and globally. (Source: AI Image)
A robust insurance system acts as a safety net for individuals and families and helps in economic reconstruction in the aftermath of natural disasters, and economic and geopolitical upheavals. Today, as India stands well poised to leapfrog its growth curve, with rising incomes, urbanization, and digital adoption, the insurance industry is likely to act as one of the key catalysts for the country’s ascent.
The Indian insurance industry stands on the brink of an important transformation, with the Union Budget proposing to raise the Foreign Direct Investment (FDI) limit in insurance from 74% to 100%.
Historically, the sector has experienced gradual liberalization: after decades as a largely nationalized domain, 26% FDI was first allowed in 2000, then increased to 49%, later to 74%, and now to 100%.
By eliminating foreign shareholding caps, policymakers hope to draw major international insurers capable of injecting fresh capital, deploying advanced risk management, and introducing innovative products. New entrants in the market will inevitably lead to more competition. However, this will also deepen the market, lead to product-side innovations, and help integrate global best practices into the domestic insurance frameworks. The 100% FDI provision will apply to companies committing to invest the full premium in Indian markets.
Also read: 5 Trends that will Shape Wealth Management Industry in India Ahead
Insurance penetration in India currently stands at 3.7% of GDP (life at 2.8%, general at ~1%). In contrast, developed economies like the US and Europe have an insurance penetration of 8-12%, while the global average is at 7%. Liberalization has proved to be a good enabler for insurance penetration both in India and globally. In India, as FDI thresholds increased, so did penetration—from 2.5% to 3.5%, and later to 3.7%.
Similarly, in Vietnam, liberalization doubled insurance penetration from 1.4% (pre-2006) to 2.4%, (2018) while South Africa, with sustained foreign participation, maintains levels above 10%. The formula is clear: FDI brings capital, expertise, and product depth. If we take the ambitious target of increasing India’s life insurance penetration to 5% and general Insurance to 3% of GDP by 2030, it would require trillions of Indian Rupees in capital. 100% FDI would be a key enabler in this journey. Moreover, higher penetration would also aid in improving financial inclusion, especially in rural and underserved regions where insurance coverage remains alarmingly low.
100% FDI will also unlock investments in long-term technologies and will drive the next wave of Product Innovation. India’s health-tech sector comprises many specialized players but few offer fully integrated platforms. With fresh capital and global expertise, insurers can unify these services into a holistic, end-to- end healthcare ecosystem - across diagnostics, surgery care, chronic care management and digital wellness capabilities.
AI and telematics are reshaping underwriting worldwide, allowing for a more nuanced and personalised assessment of risk. In health insurance, AI can analyze data from wearables and apps - covering exercise, diet, and more - to create dynamic, personalized premiums. Beyond wearables, select global and Indian innovators are also leveraging AI to holistically evaluate lifestyle, emotional health, and nutrition to tailor insurance coverage and reward healthy lifestyle and behaviours e.g., discounts for higher number of steps).
Data-driven models also improve underwriting abilities (e.g., factoring in pre-existing conditions), thus creating a win-win proposition. Similarly, motor insurers can leverage telematics (monitoring driving behaviors such as hard braking, acceleration, cornering, phone usage, time of day, and distance traveled) to reward safe driving habits or build 'pay-as-you-use' products.
While 100% FDI opens new opportunities, success will depend on overcoming key challenges. The insurance industry in India delivers close to 9% annual Total Shareholder Return (TSR) vs 11% globally, significantly lower than the investors’ cost of equity, approximately 10-12% (5 out of 8 listed insurers, which have remained listed for more than 5 years till 2024, have generated returns less than their cost of equity). This raises a fundamental question for any domestic or foreign capital to flow into the country in insurance and hence requires fundamental and structural changes to the industry. For example, is the future a significantly lower cost AI driven agency model?
Additionally, a key challenge for global players would be to build strong distribution in India. Bancassurance is largely saturated (with either captive partner or 3 partners in most segments) and the agency model is capital-heavy, slow to scale up, slow to reach profitability and struggling with stagnant or declining agent productivity (number of new policies in both life and non-life).
Raising the FDI cap from 74% to 100% is a landmark move. It can potentially alter India’s insurance landscape by enabling capital flows, expanding market reach, accelerating product innovation, and revolutionizing risk coverage and financial protection. However, success would depend on structural changes to the industry to make it value-accretive for shareholders and the ability of global players to build distribution in India. The next few years will be pivotal in determining if the Indian insurance sector emerges stronger, more inclusive, and better equipped to serve the nation’s evolving needs.
(Note: Total Shareholder Return (TSR) is a combination of three factors which includes tangible book value of equity, change in price/tangible book value and cash flow contribution to shareholders (which is a mix of dividend yield and change in share count).
Pallavi Malani is India Leader - Insurance Practice, Vipin V is Managing Director & Partner, and Tirtha Chatterjee is Principal at BCG.
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