Insurtech At A Crossroads: What 100% FDI Means For Insurance Startups

The Indian insurtech industry is at a critical juncture with the lifting of all caps on foreign investment, but are domestic players and insurance startups bullish or bearish about the entry of new competition from multinational rivals?

The Union Budget 2025 opened the insurance sector to 100% foreign direct investment (FDI), removing the 74% cap, with the condition that the premium funds remained in India.

“This enhanced limit will be available for those companies which invest the entire premium in India. The current guardrails and conditionalities associated with foreign investment will be reviewed and simplified,” Finance Minister Nirmala Sitharaman said in her budget speech.

FDI, which allows companies from one country to invest in businesses in another country, has seen India progressively liberalising the regulations since 1991 to drive economic growth. The year 2020 was the only exception when stricter screening policies were levied to prevent opportunistic takeovers after the COVID-19 pandemic.

The lifting of the cap on FDI will accelerate India to be the sixth-largest insurance market within a decade, surpassing Germany, Canada, Italy, and South Korea, according to watchdog Insurance Regulatory and Development Authority of India (IRDAI). The move, aligned with the government’s ‘Insurance for All’ mission for 2047, will also drive digital transformation in the sector.

Along the course of India’s dream run to be a robust economy powered by digital infrastructure, the fintech sector is expected to create a $2.1 Tn opportunity by 2030. Inc42’s State of Indian Fintech Report 2024 projected the insurtech space to be a $307 Bn market by this time, averaging a 17% growth rate.

“Raising the FDI limit to 100% is a game-changer for insurtech startups, unlocking capital, technology, and expansion opportunities,” said Ankit Agrawal, chief executive and founder of InsuranceDekho. In fact, industry experts Inc42 talked to were largely unanimous in calling the move a “great initiative” that will drive fresh funds into insurance.

Major insurtech startups like Acko, InsuranceDekho, Freo, Digit, RenewBuy, and Turtlemint are making rapid strides. Digit’s INR 1,125 Cr public float last May added momentum to the growth. With rising investments and advanced technology, Indian insurtech startups are poised for exponential growth in the coming years, the experts said.

A few of them, however, shared their concerns over the budget proposal on FDI.

As Kunal Varma, cofounder and chief executive of Freo, highlighted, 100% FDI in insurance will give international players a stronger foothold in the Indian market, which will further intensify competition for the local entities.

His views were echoed by Hanut Mehta, chief executive and cofounder of Bimapay Finsure. With full ownership, international insurers can implement advanced underwriting models, innovative products, and global best practices without relying on domestic partners.

“These multinational corporations have access to complex actuarial models, worldwide funding, and cutting-edge digital technologies that could threaten traditional Indian insurers,” said Mehta

As the insurtech space boils over possibilities and panic, Inc42 takes a review of the advantages and challenges for the sector along the road ahead.

What’s In Favour Of Local Insurtech Players?

Indian insurtech startups have the edge as regulatory monitoring by the IRDAI and the necessity for localisation in product offerings will throw up challenges for the foreign players. While international corporations provide experience, their success will hinge on how effectively they address India’s price-sensitive consumers and different demographic needs.

“Domestic insurers have built brand reputation and robust distribution networks, making it difficult for the overseas firms to gain an early advantage,” Mehta pointed out.

As Freo’s Varma highlighted, local players will need to differentiate themselves through a host of parameters such as:

•     Deep customer relationship: Indian insurers have a strong local presence and understanding of customer needs. They have firmed up their customer relationships with tailored policies that suit regional and demographic demands.
•     Technology and innovation: Local insurtechs and traditional insurers are rapidly adopting artificial intelligence, machine learning, and data analytics to offer personalised insurance solutions and superior customer experience.
•     Strategic partnerships: Collaborations with banks, non-bank lenders, and fintechs will help expand the reach and improve product accessibility.
•     Regulatory alignment: The insurers need to work more closely with regulators to ensure compliance and create consumer-friendly policies that align with the country’s unique market dynamics.

“While foreign players may bring capital and expertise, local players have the advantage of agility and market familiarity, which will help them stay competitive. Those that can quickly adjust to the new dynamics will succeed, according to the experts,” added Varma.

What Are The Challenges For Local Insurtech Players?

If an Indian fintech giant like Paytm or PhonePe wins exclusive ties with a multinational insurer, the distribution environment for insurance in India will change forever. The platform has a big user base and it provides a seamless digital experience. An exclusive alliance might give the multinational insurer direct market access, avoiding traditional distribution routes.

“This development may present a problem for traditional insurance companies that use agency models or third-party brokers. It could also encourage more insurers to strengthen their own digital initiatives in order to compete. However, regulatory worries about monopolisation and data privacy may arise, requiring the IRDAI to secure a level playing field,” Mehta said.

Such a collaboration may create innovative microinsurance products, dynamic pricing, and AI-powered policy suggestions based on the user behaviour. It may also speed up financial inclusion by making insurance more accessible.

Exclusive partnerships may, however, limit the choices if multiple insurers are unable to compete fairly on fintech platforms. The industry may turn to direct-to-consumer arrangements as insurers seek to lessen their reliance on aggregators.

A host of other challenges are also likely to come up in a 100% FDI regime. These include:

•     Regulatory compliance: More foreign insurers may lead to tighter regulations and increased scrutiny on how policies are priced, sold, and serviced.
•     Data security concerns: With foreign entities handling sensitive customer information, data localisation laws and cybersecurity measures will become more critical.
•     Customer trust and brand loyalty: Indian consumers still trust established local brands for insurance, and foreign insurers will have to invest heavily in brand building and customer engagement.
•     Talent acquisition and retention: As more players enter the market, attracting skilled professionals in actuarial science, underwriting, and insurance tech will become a challenge.

While the move towards 100% FDI in insurance augurs significant growth opportunities, insurtech players must focus on compliance, digital innovation, and customer-centric strategies to thrive in this evolving landscape.

Estimating Overall Impact On Insurance Industry

At below 4%, the Indian insurance sector remains grossly underpenetrated when compared to global markets. Increased foreign investment is expected to drive innovation, improve operational efficiencies, and introduce best practices from mature markets.

However, the challenge for foreign insurers will be navigating through India’s regulatory maze, building trust with Indian consumers, and competing with seasoned domestic players who have built strong distribution networks and deep customer insights.

The customer stands to gain the most, it seems. The competition will spur innovation and improve customer service standards. It may also drive mergers and acquisitions, resulting in industry consolidation. The long-term impact will be determined by how multinational corporations manage compliance, technology upgrade, and consumer behaviour in India’s insurance sector.