Why India’s Decision to Allow 100% FDI in Insurance Marks a Structural Shift — and the Risks It Carries

India’s insurance sector has crossed a historic threshold. With the passage of the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Bill, 2025, the government has allowed 100 per cent foreign direct investment (FDI) in insurance companies. The move reflects a decisive belief that the sector’s biggest constraint today is not regulation or demand, but capital — long-term, patient capital that domestic promoters have struggled to supply at scale.

Why capital has become the binding constraint

Insurance is unlike most other financial businesses. It requires sustained capital infusion over long periods, high solvency margins, and the ability to absorb underwriting risks that may materialise decades later. The “66th Report of the Standing Committee on Finance (2023–24)” noted that many Indian insurers — particularly in non-life and health insurance — face repeated capital stress.

Domestic promoters often lack both the capacity and the incentive to keep injecting capital into a long-gestation business marked by initial losses and delayed breakeven. The result has been slow expansion, limited technological investment, and weak presence in underserved or high-risk segments — all contributing to India’s persistently low insurance penetration.

The long road from monopoly to full liberalisation

The insurance sector’s opening has been gradual. Until 2000, life and general insurance were monopolised by the “Life Insurance Corporation of India” and the “General Insurance Corporation of India”.

Liberalisation began in August 2000, allowing private players and permitting foreign ownership up to 26 per cent. This cap was raised to 49 per cent through amendments to the Insurance Act, 1938 in 2015, and further to 74 per cent in 2021. The 2025 amendment completes this trajectory, signalling that the government now views foreign capital not as a threat, but as a necessity.

What higher FDI is expected to deliver

Proponents of the reform argue that full foreign ownership can unlock several gains. First, it directly addresses capital scarcity. Foreign insurers with global balance sheets are better positioned to fund solvency requirements, expand distribution, and absorb long-term risks.

Second, foreign insurers bring technical capabilities — advanced actuarial science, sophisticated risk pricing, and diversified product design — that can deepen India’s insurance market. This is especially relevant for health, catastrophe, and specialty insurance segments.

Third, expanding insurance to low-income and underserved populations requires heavy upfront investment with uncertain short-term returns. Globally diversified insurers are better equipped to bear these early losses, something many domestic investors hesitate to do.

Finally, while public sector insurers have provided stability, their dominance has also dampened competitive pressure. Higher FDI is seen as a way to strengthen private players and spur innovation without dismantling the public sector.

Global precedents India is drawing from

India is not alone in this shift. “China” has moved towards 100 per cent foreign ownership in insurance, enabling firms such as “Chubb” and “Manulife” to fully acquire local entities. Countries such as “Canada”, “Australia”, and “Brazil” have also relaxed ownership restrictions.

The immediate signal effect is visible. The “Generali Group” has already announced plans to inject additional capital into its Indian operations following the move — investment that was constrained under earlier caps.

The risks behind the optimism

The reform is not without concerns. The assumption that foreign insurers always bring superior governance is contestable. Episodes such as the global financial crisis, and findings like the 2014 Korea Finance Consumer Federation report — which showed foreign life insurers accounting for a disproportionate share of fraud cases in South Korea — raise legitimate regulatory questions.

There are also operational challenges. Foreign insurers will need to adapt to India-specific distribution structures, especially bancassurance, and design products for low-income customers rather than focusing only on premium urban segments.

Another concern is profit repatriation. Full foreign ownership increases the likelihood that a significant share of profits flows out of India, potentially limiting long-term domestic value creation and local decision-making autonomy. Aggressive market strategies by large global players could also introduce volatility if regulation does not keep pace.

Why regulation becomes the real test

Recognising these risks, the amended law strengthens the hand of the regulator. The “Insurance Regulatory and Development Authority of India” (IRDAI) has been empowered to disgorge wrongful gains, with penalties raised from ₹1 crore to ₹10 crore for insurers and intermediaries.

This underscores a critical point: liberalisation can succeed only if supervision is robust, transparent, and proactive. Capital inflows without regulatory discipline could amplify, rather than mitigate, systemic risk.

A confident bet — with conditions

Allowing 100 per cent FDI in insurance is a statement of confidence in the maturity of India’s financial ecosystem. If implemented with strict oversight, the reform can ease capital constraints, expand coverage, and deepen product innovation — all essential for moving towards “Sabka Bima”.

But the success of this shift will depend less on the headline number of FDI allowed, and more on how effectively India ensures consumer protection, market stability, and long-term domestic value creation in an increasingly globalised insurance landscape.