Unpacking the Effects of Revised FDI Policy on India's Life Insurance: Through the Lens of Profits/(Loss) and Equity

The Indian government has focused on attracting Foreign Direct Investment (FDI) to the insurance sector to drive innovation, increase competition, and improve access to insurance products. The FDI policy has undergone several changes to achieve these goals. The literature assessing the impacts of FDI policy and changes in it pertaining to the insurance sector has remained scarce in terms of the empirical investigations. The current study explores the statistical significance of the changes in FDI limit for insurance sector, from 26 percent to 49 percent that have been implemented in the beginning of the past decade. The scope of the study is limited to the life insurers only. For the purpose, it employs Granger causality test, Hausman test and difference in difference model. There are six model specifications of which three different specifications regress profits/loss after tax and another three different ones regress Indian equity investment on the suitable regressors. Different statistical information criteria support the choice of the best fit model and further these chosen models are checked for the validity and robustness with the help of plots of standardized residuals, tests for Heteroskedasticity-robust standard errors, Placebo test, Wald test and Sargan test. The results suggest that those life insurers which have received additional foreign direct investment due to the increase in the FDI limit from 26 to 49 percent have been benefitted differently in terms of profit earning capacity as well as attracting the Indian promoters. Such life insurers attracted more Indian promoters as well as earned hike in their profit after tax which is statistically confirmed by the positive nature of the relationship of response variables with the DID coefficient.