As part of further rerorms in the insurance sector, there are attempts to bring in two laws to amending the existing insurance acts. These laws are: The Insurance (Laws) Amendment Bill 2008 and The LIC (Amendment) Bill 2009. These amendments have far reaching inpact on the insurance sector in India in particular and for the entire national economy in general.
The Insurance (Laws) Amendment Bill 2008 seeks to amend certain provisions of the Insurance Act 1938, General Insurance Business (Nationalisation) Act 1972 (GIBNA) and Insurance Regulatory and Development Authority Act 1999.
AMENDMENTS TO THE GENERAL INSURANCE BUSINESS (NATIONALISATION (ACT) 1972
Even a cursory reading of the above amendment makes it clear the purpose of this amendment is to privatize the GIC and the four companies. The GIC and the four public sector companies have been performing admirably well. While doing business, they have never neglected the social objectives of the public sector. They have a number of schemes catering to the needs of the rural and social sectors.
The General Insurance Corporation is very sound financially. It has a large asset base and reserves. It is capable of meeting the capital needs through internal resources. Similarly, the four companies are also financially very sound. They have assets worth Rs.78198 crore and reserves of Rs.13254 crore as on 31st March 2008. They have been regularly generating profits and making huge dividend pay outs to the government. Therefore, these national institutions do not require approaching the capital markets to raise funds for their expansion. Privatising these successful institutions does not serve any national interest. Rather than this measure to privatize, the government must seriously consider the merger of the four companies into a single monolithic corporation on the lines of LIC as suggested by the Parliamentary Committee on Public Undertakings. This would help them to serve the social and rural sector and fulfill the objectives of a public sector with greater amount of success.
AMENDMENT TO THE INSURANCE REGULATORY AND DEVELOPMENT ACT 1999
The major amendment that is being proposed is to increase the foreign equity participation to 49 percent from the present 26 percent. It is being argued that insurance business being capital intensive, the Indian partners lack resources to expand the business. The other arguments are that hike in FDI would bring technology, enable product innovation and generate resources for infrastructure development. These arguments are in total variance with the actual experiences since the opening up of the insurance sector and therefore do not stand test of reasoning.
The argument that Indian partners are short of resources is simply unacceptable. It is known that many of the private insurance companies are subsidiaries of flagship corporate houses such as Tatas, Birlas and Reliance which have extremely strong balance sheets, ready access to financial markets and healthy capital reserves. In the recent period, we have seen that the Indian Corporate houses have invested heavily abroad to acquire foreign companies. Acquisition of Corus by Tatas is just an example. Therefore the argument that Indian partners in the insurance companies lack resources to meet the needs of their business just cannot be true.
Insurance industry has made impressive progress in the last few years thanks to the growth in the economy and increased disposal income in the hands of the middle classes. The life insurance penetration in India is much higher than many developed countries thanks to the performance of LIC. The private sector has spread across the country . Therefore, the argument that they have not be able to expand due to resource crunch is simply not true.
The Indian insurance industry is highly developed and technology adopted sector. In fact LIC has the highest technology spend in the entire country and is in possession of the best possible technology. Therefore, hike in FDI is not required for technology import. The Indian insurance industry has a large number of products designed to suit the needs of every section of population and there are continuous innovation of products to benefit the customers. Even on this count, there is absolutely no need for FDI.
The 26 percent limit on foreign equity participation has not been an entry barrier. Today around 35 private life and non-life insurance companies are operating businesses in India. The IRDA is continuously receiving applications for licences from the foreign players and their Indian partners to operate business in India.
Today more than 92 percent of the life insurance business transacted by the private companies is in the form of unit linked policies. Under these policies, the risk of investment is undertaken by the policyholder and a large portion of the premium fund is invested in the stock markets. This limits the ability to invest in the infrastructure and social sector. Of the 90000 crore invested in the infrastructure as at 31.3.2008, LIC alone has invested close to Rs.82000 crore.
The assurances given at the time of opening up of the insurance sector in 1999 that foreign partners would bring considerable portion of their global premium into India has not proved right. Except for the share of their capital, the foreign partners have not brought any additional funds for investment in Indian infrastructure.
The hike in FDI would allow foreign capital to gain greater access and control over our domestic savings. This surely cannot be in national interests.
The benefits of FDI are being critically re-assessed across the globe. The World Bank which stridently pushed the idea that FDI is the most important element to promote the domestic economies has now adopted a more cautious approach. The World Bank supported Growth Commission under the chairmanship of Noble Laureate Micheal Spence observes “our view is that foreign saving is an imperfect substitute for domestic saving, including public saving to finance the investment a booming economy requires.” This observation and the experiences of FDI across the globe makes it clear that it is the domestic savings that provide most stable funds for investments in economy and therefore the Government must control these savings rather than place them at the disposal of foreign capital.
The world is going through a period of worst financial crisis. The entire insurance industry in United States, Europe and Japan is in great turmoil. The bail out of AIG is too well known. Similarly in Europe Fortis, ING, Aegon had to be bailed out by their governments. The big insurance companies have been seeking aid from their governments for survival. The rating agencies including Fitch have down graded insurance industry in all these countries. These rating agencies have also projected that the insurance industry would remain in a stagnant stage for the next 18-24 months. Under such circumstances further liberalizing the Indian insurance sector is highly imprudent.
Insurance industry plays the important role of providing security to the policyholders and converting the small savings into capital for investment in critical infrastructure sector. At a time when the government has to make heavy investments in infrastructure to create domestic demand, the savings mobilized through insurance play a very important role. Therefore, the government must gain total control over the domestic savings rather than allowing the foreign capital to use them for their speculative endeavours.
THE LIC (AMENDMENT) BILL 2009
LIC (Amendment) Bill 2009 aims to increase the equity of LIC from Rs.5 crores to Rs.100 crores. This on the face of it appears to be a harmless amendment. But read in the context of the Malhotra Committee recommendations which recommended disinvestment of LIC and GIC to 50%, this has a portent of being the first step towards disinvestment of LIC in future.
LIC has assets worth Rs.8, 73,000 crores and a liability of Rs.8,07,000 crores. Thus the assets are Rs.66,000 crores more than the liability.
For the past 53 years the expansion of LIC was met by its own funds and government did not provide any additional capital. This goes to show that LIC does not need any equity increase except for the argument that Rs.5 crores equity is too small to disinvest and would not enthuse the market and hence it had to be increased to Rs.100 crores to facilitate disinvestment.
The LIC (Amendment) Bill 2009 also contains another amendment to provide sovereign guarantee on a selective basis, instead of the absolute guarantee provided all these years.
LIC never utilized the sovereign guarantee for marketing its products, nor did it utilize sovereign guarantee for meeting the claims even during the natural calamities like Gujarat Earth quake, Tsunami etc. Apart from paying the taxes, LIC also pays dividend every year to the Government and the dividend paid to the Government for the year 2008 alone was Rs.829.59 crores and during the year 2009 the dividend declared is Rs.929 crores. So LIC has no history of dependence on the government for its payments. LIC paid the claims promptly out of its own funds during the natural calamities like earthquake, tsunami etc.
Hence, there is no case for withdrawl or modification of the sovereign guarantee since such a proposal would affect the confidence of the policyholders.
It is acknowledged that no other institution in this country evoked such massive confidence as LIC which has succeeded in earning tremendous confidence of its policyholders and trust of the nation as a whole. The confidence of the people is once again exhibited when LIC could mobilize more than Rs.10,600 crores under one single product named “Jeevan Astha” within a period of 45 days during the financial year 2008-09.
Presently the surplus generated by LIC each year is distributed to the policyholders and the government in the ration of 95:5. Now an amendment proposed in the Bill suggests that the policyholders’ share may be brought down to 90%. This is against the interests of the policyholders who are the real owners of LIC.
As on 31.3.2009 LIC’s investments in the government and social sector investments stand at Rs.5, 29,525 crores. During first two years of the current five year plan, LIC already contributed Rs. 218510 crores to the five year plan.
The government should not make any moves to destabilize this institution.
Report of the Committee on Investor Awareness and Protection
INSURANCE IS THE SUBJECT MATTER OF SOLICITATION.
Unlike other financial products Insurance is a service which is sold and not bought. Unlike mutual funds where bulk of the investments are made by the Corporate Sector and they having the ability to negotiate the terms, life insurance is a hundred percent retail sale.
It requires an enormous amount of patience to close one insurance sale and there is no guarantee that every attempt would succeed. Some of the LIC agents say by experience that out of 10 persons they approach one may seek the insurance policy. That is the reason why there are huge numbers of drop outs among the people who come to take up agency as their profession.
The Insurance Act 1938 prescribes a ceiling on commission rates, which could be paid to agents for different classes of business. Commission rates are lower for short term and high premium policies and higher for long term and low premium policies in order to regulate the absolute commission earned.
So, even when the LIC’s premium income grew during 2002 to 2009 manifold, the commission paid to the agents during the last seven years shows that as a percentage of the total premium collected, the commission paid to the agents has come down from 9.15% to 6.38%.
The average commission payouts by the insurance industry as a whole have also been reducing every year.
There are recommendations in the Report of the Committee on Investor Awareness and Protection that the customer would directly pay the compensation for the advice/sale. These are not practicable and fair in the present situation where insurance as a product is only to be sold and not bought by the customers. It must be understood that in India a customer would feel that he had done a service by taking out a policy through an agent, instead of feeling that he has taken the service of the agent. This being the position, the argument that the customer would directly pay is not a practicable solution and it would drive away the agency force and would impact the whole insurance industry and the capacity of the insurance companies to mobilise the savings of the people even the IRDA chief express similier concerns. At a time when the country needs huge resources for infrastructure development, any tinkering with the existing commission payment pattern would not only harm the industry but would severely impact the national economy.