People's Democracy

FDI Hike in Insurance Harmful

Amanulla Khan

THE UPA government’s decision to hike FDI limit in insurance and allow foreign equity participation in the pension sector is meant to placate the domestic and international finance capital. The government feels this decision will fuel foreign investors’ interest in India and help revive our faltering economy.  But from the past experience, it becomes clear that this move would neither benefit the Indian economy nor bring any gains to the insuring public. Despite vehement protests by the AIIEA, a number of political parties and the democratic opinion in the country, the government appears determined to bring the necessary legislation in the coming winter session of parliament and work for its approval. The finance minister has been going round the country justifying the FDI hike, exuding confidence that the Bill will pass the test with the support of BJP, the main opposition party.

The decision to hike the limits of foreign equity participation is not new.  It was taken in 2004 itself when UPA-I assumed the reigns of power in the country.  The UPA-I government could make no headway in this direction as it was critically dependent on Left parties’ support for its survival and the Left had made known in no uncertain terms that FDI hike is unacceptable to them.  The arguments against FDI hike put forth by AIIEA also pushed the government on the back foot. The UPA-I introduced the Insurance Laws (Amendment) Bill 2008 after the withdrawal of support by the Left parties.  This Bill was brought to amend the Insurance Act 1938, IRDA Act 1999 and General Insurance Business Nationalisation Act 1972. The government justified the Bill saying that some of the provisions in these three Acts had become archaic and need modification to meet requirements of the modern insurance industry. But the real intent was to further liberalise this sector and place it in the architecture of global finance capital.

STANDING COMMITTEE

DECIDES AGAINST FDI HIKE

The opposition of the Left to this Bill and the popular support AIIEA mobilised against this move forced the government to refer the Bill to parliamentary standing committee on finance for closer scrutiny. The AIIEA submitted a written submission to the standing committee and also deposed before the committee to explain its  opposition to the FDI hike. The AIIEA also argued against the proposal to allow the GIC and four public sector general insurance companies to raise capital through disinvestment. The standing committee came to the unanimous conclusion that there is no need to increase the foreign capital in insurance industry. The standing committee observed that “the government seems to have decided upon this issue without any sound and objective analysis of the insurance sector following liberalisation”.  Cautioning the government of the global financial crisis, the committee recommended to the government that the private companies may explore avenues to tap the domestic capital instead of increasing the FDI limits. The standing committee, however, by majority opinion agreed with the provision enabling privatisation of GIC and four public sector general insurance companies with Moinul Hassan, CPI(M) MP, being the lone dissenting voice.  In order to allay our fears on privatisation, the standing committee recommended that the government must ensure that at no stage the government equity holding in these companies comes below 51 per cent.

The union cabinet that met on October 4, 2012 rejected the unanimous recommendation of the standing committee and decided to hike the FDI limit in insurance to 49 per cent from the present 26 per cent.  It also decided to allow the GIC and four public sector general insurance units to raise capital through public offerings.  In a separate move it also decided to push ahead with the Pension Fund Regulatory and Development Authority  (PFRDA) Bill permitting foreign equity into pension funds on the lines of insurance. In deciding these issues, the government has been advancing the same beaten arguments again.

TOTALLY

UNCONVINCING

The finance minister and the chairman of Insurance Regulatory Development Authority (IRDA) have been making statements that the insurance industry is starved of capital and is unable to grow.  Both of them have been projecting that the industry needs another 5 to 6 billion US dollars to expand the businesses and increase the penetration level.  The statement of IRDA chairman contradicts its own earlier stand that 26 per cent cap on foreign equity limits has not hampered the expansion of the private sector. These were the very same projections made before the parliamentary standing committee on finance.  The standing committee noted that the projections as per the chairman of IRDA during his deposition are “just an arithmetic’, ‘not very accurate’ and ‘just a general estimate of where the industry stands’.  The standing committee dismissed these arguments as lacking sound basis and totally unconvincing. The total capital deployed by the foreign partners in a period of over 10 years is just a little over 1 billion US dollars (Rs 6813 crore).  The experience of the past 10 years does not justify the expectation that foreign capital would flood the industry once the FDI cap is raised.

The private companies did not suffer for want of capital either.  All the 41 private companies in the sector have pan India presence. These companies have been promoted by big industrial and financial houses. Being the giant industrial and financial conglomerates, they have access to enormous resources. The experience of the past few years suggest that the parent companies of the private insurers have been heavily investing and purchasing businesses outside the country. The available statistics also suggest that there has been more outflow of capital than inflow. These companies can tap the domestic resources if infusion of capital is needed.  The rules also permit the companies with more than 10 years in business to make public offerings. Therefore, the argument that insurance industry can survive and expand only with the hike in FDI is untenable.

The life insurance industry in India had been performing exceedingly well since its nationalisation in 1956. The coverage by LIC even at the time of opening up of the industry was surprisingly high considering the low per capita income and lack of disposable income in the hands of overwhelming sections of the population.  It is a fact that the reach and coverage of life insurance at the time of opening up of the sector was greater than that in many countries with 5 times or more higher per capita income.  It was a mere coincidence that the country registered a growth of 8 to 9 per cent in the post opening up period till the economy felt the impact of global financial meltdown of 2008. The IRDA Annual Report for 2010-11 notes that premium mobilisation of the life insurance industry is around 4.4 per cent of the GDP. The life insurance penetration in India compares favourably with the United States 3.5 per cent and Germany’s 3.3 per cent.  It also compares favourably with the global average of 4 per cent. The argument that insurance penetration is low and therefore the industry needs additional infusion of foreign capital is just not correct.

The growth of the life insurance industry critically depends on the levels of incomes, particularly levels of disposable incomes. The last two years have been very difficult for the Indian economy. The insurance industry cannot be an exception. The domestic savings for the year 2011 were at an 11-year low and the financial savings were at a 21-year low.  This resulted in the lower collection of premium and also forced the private companies to close down branches and prune down the work force.  Some foreign insurers like Sunlife have exited India and others like ING are looking to sell their stake. Most of these foreign insurers are in difficulty in their own countries and their first priority is to consolidate their businesses there. Even in such difficult period the public sector performed well.  The LIC regained the market share.  Its share in premium income in August 2012 is 76 per cent and it has 81 per cent  share in the number of policies.  The private sector finds it difficult to beat the LIC and the FDI hike is another attempt to weaken the public sector.

HIGH REPUDIATION OF

CLAIMS IN PRIVATE SECTOR

The experience of the past one decade confirms that the insuring public has not benefitted by the opening up of the industry.  The claim settlement is the final test for an insurance company.  The IRDA statistics reveal that nearly 11 per cent of the death claims are repudiated by the private companies on average.  The LIC holds the best claim settlement record.  It settles 99.86 per cent of the claims intimated.  The IRDA itself has expressed concern that the lapsation of policies in the private sector is very high. There are companies with lapsation ratio of over 40 per cent.  The LIC has the lowest lapsation ratio of 5 per cent.  The IRDA has gone on record to say that insuring public has suffered due to high lapsation and private companies have been able to earn profits due to this. This scenario clearly makes a case that FDI hike cannot bring any gains to the policyholders.

NOT MUCH CONTRIBUTION

TO INFRASTRUCTURE

There is no dispute that India needs huge funds for infrastructure building.  But the argument that increasing foreign equity in insurance will help in generation of funds for infrastructure is flawed. The experience of the past one decade and more of opening up of the industry clearly suggests that the private sector has made minimal contribution to the infrastructure funds. The hype created at the time of opening the sector that foreign partners will bring substantial portion of their global premiums into Indian infrastructure has turned out to be totally untrue.  It is a pity that this UPA-II government has made development hostage to foreign capital with the understanding that Indian economy cannot grow without it. Finance capital is always in search of quick profits.  It does not come to any country to express gratitude or help the growth and economic development of that country.  It basically comes for profits. Therefore, to expect that foreign capital will come into infrastructure projects that have long gestation period is a totally flawed understanding. Hiking the FDI limits and allowing the foreign capital gain greater access and control over the domestic savings will harm the national economy instead.

The insurance industry is facing serious stagnation in the United States and the West. India has a young population.  More than 65 per cent of the population is below 35 years of age.  The country lacks any social security. All this makes India a very attractive market for both insurance and pensions in the long term.  That precisely is the reason why foreign capital wants a greater space in the financial sector.

PRIVATISATION

IS IMPRUDENT

The move to privatise the GIC and four public sector companies is imprudent.  These companies are profit making and have contributed enormously to the nation-building activities. They are adequately capitalised and have huge assets and reserves. They are capable of raising resources internally in case they need additional capital. Privatising them is to hand over the most precious public assets to the private interests. The public sector needs consolidation instead of privatisation. The four companies should be merged into a single corporation on the lines of LIC to help in leveraging the collective strengths to meet the competition and to carry out the social obligation. 

The FDI hike in insurance, foreign equity participation in pension funds and privatisation of public sector general insurance companies would harm the national interests and place the savings of the people in the hands of the speculative forces. These measures have to be fought resolutely.  The public and political opinion has to be mobilised along with the industrial actions by the insurance employees to defeat the nefarious games of the UPA-II government.

(The writer is president, All India Insurance Employees’ Association)