"The FDI cap should be raised above 50 per cent within a short period so that foreign investors would have management control commensurate with their investment and the flow of FDI to the sector will increase," US Ambassador to India David C Mulford said in New Delhi at a conference on Indian insurance market.
Calling for immediate redressal of policy issues, Mulford said there was an understanding that the FDI limit would be raised to 49 per cent and many companies entered Indian market with this expectation.
"Failure to follow through in raising the cap is increasingly seen by investors as a breach of faith," he said, adding that "if India wishes to regain its credibility in the eyes of foreign investors this promise of 49 per cent FDI needs to be delivered sooner than later".
Till date, Indian insurance industry has attracted only $235 million foreign direct investment. He said the current minimum capital requirement of $22 million (Rs 100 crore) for setting up a health insurance company is a significant barrier to entry, particularly when FDI is restricted to 26 per cent.
Expressing concern over lack of data for pricing health insurance products and poor service and hygiene standards, Mulford said "it is not surprising that not a single health insurance company is among the 22 new private insurance companies licensed since 1999".
Mulford also made a strong case for raising the FDI limit for reinsurance and auxiliary insurance services like brokerage and actuarial services. Though competition has increased in the sector, the private sector players still have a low market share of 10-15 per cent.
The heavy hand of the government still dominates the market, with price controls, limits on ownership and other restraints, Mulford said, adding "we saw it in IT sector, we saw it in telecom sector, and we are seeing it in aviation sector. Why can't insurance be next?"
Administered price mechanism for fire and car insurance distorts market as it was not risk-based and the Insurance Regulatory and Development Authority should dismantle the tariff regime to make these segments competitive, he said.
IRDA should also create a regulatory environment that promotes efficient use of capital, allows companies to price products and creates level-playing field between private and state-owned insurance companies.
The Ambassador also sought change in investment pattern of the insurance companies which now invest over 60 per cent in government securities.
He said the capital insurance industry generate is being lost as a source of long-term capital and the regulator must change the guidelines to allow corporate and infrastructure projects access to insurance funds.
