When it comes to the insurance industry’s emerging markets, they don’t come much bigger than India.

While this near limitless upside has enticed many insurers into the market, some serious obstacles remain, a new report from A.M. Best concludes. “Continued economic growth, an expanding middle class and heightened demand for health insurance are resulting in foreign insurers and reinsurers seeking to establish a greater presence in the country,” the report states. “However, while the insurance sector offers prospects for growth, it is also characterized by challenges and frustrations.”

For foreign insurers, one of the most fundamental of challenges comes from India’s limit on foreign direct investment (FDI). Currently, foreign firms are limited to a 26-percent ownership stake. A piece legislation intended to raise the FDI limit to 49 percent, the Insurance Laws (Amendment) Bill 2008, has yet to pass. Proponents of lifting the limit argue that in order to accommodate the widely anticipated acceleration in premium growth in the Indian insurance market, private insurers will need a substantial capital infusion.

“Foreign insurers continue to press for a lifting of the FDI limit, as shown by a November 2011 letter from international trade groups, which included the American Council of Life Insurers, the Association of British Insurers, the European Insurance and Reinsurance Federation and the International Underwriting Association,” the report states. “However, recent political developments make it appear increasingly unlikely that the FDI limit will be raised in the near term. While international insurers say raising the threshold would provide additional funds as well as greater technical knowledge and expertise, some domestic participants say there is no need for the FDI limit to rise as capacity is available and the market is already competitive.”

To be sure, the market is competitive, with large, entrenched players in both the life and non-life sector. “Public sector undertakings (PSUs)—New India Assurance Co., United India, Oriental Insurance Co. and National Insurance Co. in the non-life sector, and Life Insurance Corporation of India—remain the dominant players,” the report states. “Private insurers are finding it particularly challenging to achieve profits, owing to the costs of establishing distribution channels and creating a customer base by offering competitive prices.”

Despite these challenges, the report expects foreign insurers to continue to flock to the Indian market lured by the prospect of burgeoning middle class and rapid economic growth. According to statistics from the Insurance Regulatory Development Authority (IRDA) for the year ended March 31, 2011, total premiums increased $75.45 billion. While the life sector is fairly mature, their remain ample room for P&C and health insurers. “There has been a greater awareness of the benefits of life insurance offerings, while skepticism has surrounded non-life products. Consequently, insurance penetration for the non-life segment reached just 0.78 percent in 2011.”

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