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 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 Germany 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 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 India
S.Ramesh Kumar,
General Secretary,
A.I.I.E.A,
Chennai Division
