FDI hike in Insurance Sector – good or bad.
Our finance minister Mr.Arun Jaitely while submitting the first Budget proposal of the BJP led NDA government announced that FDI in insurance sector will be increased to 49% from the present 26%. The government moved with a lightening speed to implement the proposal and announced its intention to introduce ninety seven amendments to the existing insurance amendment bill 2008 in the Rajya Sabha, to consider and to pass it on 31.7.2014. But because of the opposition, the bill has hit roadblock.
Then the bill was referred to Select committee of Rajya sabha. The select committee has given its recommendation to government. The government instead of passing the bill in Rajya sabha now introduced the Insurance Amendment Bill 2014 in Lok Sabha and passed the Bill on 4.3.2015. The BJP while in opposition has consistently taken a position that FDI hike in Insurance Sector should not be allowed. Contrary to the position the bill was introduced and passed in Lok Sabha.
The insurance amendment bill is pending for passing for the last six years. The BJP has consistently opposed the bill, while it was in the opposition. Now in power they passed the bill .The reason for the turn around is a mystery. The Standing Committee headed by Mr.Yaswanth Shina of BJP rightly presented a report against the hike in FDI. Before going to the question whether FDI hike is needed in insurance sector, we should see what are the benefits accrued to the nation by the opening up of the insurance sector.
When IRDA act was passed in the year 1999, the reason advocated for the opening up of the insurance sector for private capital and for 26% of FDI is, that the nation needed the precious capital for the development of infrastructure. The insuring public will get innovative choices in insurance products, to give insurance cover for a larger population which is yet to be covered by insurance, to deepen and broaden the insurance coverage, to increase the penetration of the insurance and to open branches more in rural areas to serve the rural population and to improve the services to the policy holders. We have to make a reality check, whether all this averments and promises made form parliament by the then finance minister were realized.
The IRDA bill enacted in the year 1999 stipulated 50% of mandated investments for the private insurance companies. Before opening up, LIC has invested at an average of 98.5% of the premium income from the year 1980 to 2001 in various government schemes. But the investment of private companies in the year 2002 and 2003 is below 70%. The minimum capital requirement to open insurance companies is just hundred crores of rupees. Insurance Sector unlike manufacturing is not capital intensive. In many countries the minimum capital requirement for an insurance company is much lower than in
. The high solvency margin and
other regulations are so framed as to make it look that an insurance company
cannot do business without FDI. The much boasted foreign direct investment in
insurance sector has brought only around nine thousand crores in this fifteen long
years of their operations. Much hyped windfall of FDI to infrastructure sector
due to the opening up of insurance sector has remained as a pipe dream. India
One of the stated objectives is that by opening of the insurance sector for private participation will give innovative insurance product choices to insuring public is not true. The private companies which started their operations with much bang failed to offer even good conventional insurance products. They only sold market linked products. Because of this unhealthy selling of unregulated unit linked products by private companies, the nationalized behemoth LIC was forced to sell unit linked products. The bubble was broken when economic meltdown hit the world economy. When ULIP products became a curse, the balance sheets of all the private companies became red, LIC survived because of the innovative conventional product like endowment policy, Jeevan Anand, Money back policies, children’s policies, pension plans and so on. Hence the claim has become a hollow slogan.
Insurance is a business with utmost good faith. This is a concept of selling a promise. One of the other objectives was, to accelerate rate of growth of premium income and improve insurance penetration. But, there is only deceleration in premium growth and near stagnancy in insurance penetration.
What would have been the position had the insurance sector not been opened? The average annual growth rate of total premium income of LIC was 19.5% during the Nineties. Assuming that the same average rate of growth would have been maintained, the total premium income in 2013 – 14 would have been, Rs.337, 256 crores. Same as the combined total premium income of LIC and the Private Insurers put together in 2013 - 14. So, what has been achieved by the opening of insurance sector in 1999? Addition of 23 life insurance companies. Deployment of about Rs.40, 000 crores as capital, in an industry that needs no capital, to achieve an annual premium income of less than Rs.80, 000 crores (of which about Rs.30, 000 crores is first year premium income). Steep increase in Lapse rates. LICs premium income in the year 2013-14 was Rs.240000 (approx) with the deployment of Rs.100/- crore. (Only Rs.5/- crore, before LIC amendment act 2011). So the opening up of insurance industry has brought nothing tangible in terms of premium.
The claim regarding penetration is not on sound economic principle; there is a great possibility for improvement. It is linked to the purchasing power of people to buy insurance protection. Life insurance penetration in
India is at
3.1% compares favourably with 3.2% of United
States, 2.9% of Canada
and 3.1% in .
has a higher level of penetration than many of the developed nations. The life
insurance penetration in the year 2001 is 2.71% before the operations of
private insurance companies. We can
improve upon this if the income levels and disposable incomes of common masses increase.
According to Prof.Arjun sen gupta committee report more than 77 crores of
people earn a daily income of less than twenty rupees, how with such a low
income people can afford to have insurance protection. So the argument is a
fallacious one. India
Competition will improve the service in insurance companies and to have more branches in the rural area is not all on the right side of the argument. Private companies and FDI came to insurance industry not to cater to the policy holder but to make profits through insurance business.
The per capita premium of Insurance policies sold by private companies are to the tune of Rs.30000/- and the premium of insurance policies sold by LIC is Rs.12000/- amply demonstrates that the private companies are not catering the rural masses. They are serving only the high end customers. The claim settlement of LIC stood at 99.68% as on 31.3.2014. The claim settlement of private companies stood from 27% to 96% as per IRDA. The rejection of claim by LIC as 2012-13 is 1% and the average claim rejection by twenty three private companies in this period is around 14%. Rather the private companies are not even opening the mandated branches in rural centers. This became quite clear when the former finance minister Mr.P.Chidambarm asked LIC to open Mini offices in centers where the population is ten thousand only.
The efficiency and bench mark for the service should be linked to the settlement of claim. If that is taken as the yardstick the nationalized LIC has performed exceedingly well. Hence the argument put forth for the opening was not successful even after fifteen long years. Now again the government of
is placing the same old arguments to hike FDI in the insurance sector. India
The hike in FDI limit to 49% will bring much needed funds to the starved insurance companies, which in turn will help infrastructure sector to develop, new innovative products will be developed, the immediate injection of twenty five thousand crores will boost our economy are the claims made by the government in the floor of the parliament.
There is a saying experience is a good teacher. But our rulers never learn from experiences. The opening of the insurance sector has brought any tangible benefits neither to the policy holder nor to the nation. In fact the insuring publics are losing out. When this is the case, how a mere increase in FDI will bring twenty five thousands of crores of rupees. Government wants to bring in more FDI in Insurance. What for? It will always remain a mystery.
Let us assume a situation that all the foreign companies who are partnered with Indian operators are willing to invest another twenty three percentage will only bring approximately another nine thousand crores. If we take the argument of the government correct and assume that the foreign companies are willing to invest another sixteen thousand crores, then correspondingly the Indian partners also have to invest around sixteen thousand crores to maintain the equilibrium in investment. The government is already claiming that the Indian insurance companies are starving for funds, which is the reason to hike FDI in insurance sector. When this is the scenario? Whom they are trying to hoodwink. The poor insuring people.
The opening up of insurance sector failed to bring in any new products, how the FDI increase will bring new innovative products? The regulator IRDA who is a developer compelled the nationalized behemoth LIC to withdraw the most popular innovative conventional insurance policies by 31.12.2013 in the name of redesigning of products. After this, what ever products available to the insuring public at lower rates are not now available to them. So the claim is a bogus argument.
So the argument put forth by the government of
FDI is bad. In order to safeguard the interest of the insuring public and for
the welfare of the nation, the precious savings of the people needs to be
protected. For this the proposed insurance amendment bill should not be enacted
by the parliament in the interest of the nation. India