The Finance Ministry has notified final rules for foreign investment limit of 74 per cent in the insurance sector, which came into effect on May 19, 2021.

The new arrangement is expected to benefit 23 private life insurers, 21 private non-life insurers and 7 specialised private health insurance companies. Considering the capital required for pandemic induced expansion needs, finalisation of rules will be helpful for the insurance sector, officials feel.

One of the major proposals is the additional layer of solvency margin for higher limit of foreign investment. It prescribes 50 per cent of net profit in a financial year needs to be retained in the general reserve provided the solvency margin is lower than 1.2 times of the control level of solvency and the payment of dividend on equity shares.

Solvency margin is the excess of value of assets over the value of liabilities. Similarly, solvency ratio refers to the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margrin. At present, IRDA prescribes this ratio at 150 per cent.

The rules also stipulate that for an Indian insurance company having foreign investment -- majority of its directors, key management persons, and at least one among the chairperson of its Board, its managing director and its Chief Executive Officer -- will be a Resident Indian Citizen.

Any Indian insurance company having foreign investment, “existing on or before the date of commencement of the Indian Insurance Companies (Foreign Investment) (Amendment) Rules, 2021, shall within one year from such commencement comply with the requirements,” of rules related with management persons, it further stipulates.

Total foreign investment here would mean the sum of both direct and indirect foreign investment. Direct investment by a foreigner will be called Foreign Direct Investment, while investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as Indirect Foreign Investment.

Foreign investment up to 26 per cent was permitted in the insurance sector in 2000. Later, in 2015, this limit was raised to 49 per cent.

According to a State Bank of India analysis, the pandemic has shown that there is need for further penetration of insurance in India and for that capital infusion is required. The report, using March 2019 data, said average FDI investments in the 23 private life insurers is only 35.5 per cent, 30 per cent in 21 non-life private insurers and 31.7 per cent in 7 specialised health insurance companies.