The government’s proposal to overhaul its insurance laws, including raising the cap on foreign direct investment (FDI) to 100 per cent, has sparked optimism and unease.

In a draft amendment to the Insurance Act of 1938, the finance ministry aims to encourage competition, simplify regulatory processes and expand the market to underserved areas.

Key provisions include raising the FDI limit from 74 to 100 per cent, reducing capital requirements for foreign reinsurers and introducing composite licenses, allowing companies to offer multiple classes of insurance.

“The proposal to allow 100 per cent FDI could marginalise smaller Indian companies that lack the financial muscle to compete with global giants,” said Tushar Kumar, a Supreme Court advocate. He added that fully foreign-owned insurers might prioritize profit over affordability and inclusivity.

Kumar suggested retaining the current 74 per cent cap while imposing safeguards such as data localisation, reinvestment requirements and domestic ownership mandates to ensure market stability.

Supporters argue that opening the insurance sector fully to foreign investment would bring much-needed capital, technological innovation and competition.
“This is a significant opportunity for India,” said Yashojit Mitra, a partner at Economic Laws Practice. “Increased foreign participation could make insurance more affordable and accessible, particularly in Tier 2 and 3 cities.”

Mitra emphasised the need for regulatory vigilance on these “foreign companies complying with all local rules and regulations, data privacy concerns, curbing any potential market predatory practices by these foreign players and ensuring that everyone (including the local players) has a level playing field.”

Shailaja Lall, a partner at Shardul Amarchand Mangaldas & Co, said “The proposed amendments to the Insurance Act, 1938, go beyond merely repackaging old reforms. Much will now depend on which of these proposals will finally be approved by Parliament and how soon will regulator IRDAI implement them.”

The draft proposes formal recognition of managing general agents (MGAs) as insurance intermediaries. The amendments also define key terms such as “insurance business” and “premium,” while expanding the scope of activities insurers can undertake.

These additional functions include managing indemnity and guarantee business, handling and selling properties acquired through claims and removing the cap on insurance agents partnering a single insurer in the same business class.