The most substantive arguments against the liberalisation of the insurance sector have come from its workforce. For nearly two decades, the biggest union in the Indian insurance industry, the All India Insurance Employees’ Association (AIIEA), has opposed the entry of foreign capital in the insurance industry. Amanulla Khan, president, AIIEA, spoke to V. Sridhar about the issues raised by the decision to increase the cap on Foreign Direct Investment (FDI) in Indian insurance companies from 26 to 49 per cent. Excerpts:
What are the main reasons for your opposition to FDI in insurance?
Insurance is a long-term contract. An insurance company deploys funds in long-term investments in order to be able to pay claims that may arise in the future. Insurance funds are thus suitable for developing national infrastructure and capital formation. In a developing country like India, the government needs to retain some control over domestic savings instead of allowing foreign investors to enjoy control over Indian savings. The Parliamentary Standing Committee came to the same conclusion. It recommended that the cap on foreign direct investment (FDI) be retained at 26 per cent.
But there is the claim that insurance penetration has improved in the last decade because of competition. More will be better, they say…
It takes only common sense to understand that insurance depends on economic growth and the level of disposable income in the hands of the people. It is purely coincidental that when the insurance industry was opened up in 2001, the economy was growing at about eight to nine per cent. But there has been stagnation in the last two years and private companies have closed down 34 per cent of their branches and cut their workforce by 30 per cent.
Why then are private insurers gleeful about the impending increase in foreign stake in their ventures?
The Insurance Regulatory and Development Authority (IRDA) had said that companies that have been in business for 10 years can raise fresh capital. If they really do need capital, why not go to the market to raise resources? Why do they have to look to foreign capital? The simple reason is that India is still an attractive market for foreign capital in the medium to long term. The insurance markets in advanced capitalist economies are in serious stagnation. They find the demographic composition of the Indian population very attractive — 65 per cent of Indians are under 35.
How has the pre-eminent Indian insurance company, the Life Insurance Corporation, coped with competition?
The LIC adapted to the competitive environment very well. It offered better products and improved its servicing standards. The AIIEA also helped create a better work culture and a sense of belonging to the institution. The LIC dominates the life insurance market today with 76 per cent share in premium income and 81 per cent in the number of policies.
Private companies have focused on unit linked insurance policies (ULIP) where returns are dependent on the stock markets, which implies that the risk is borne by the person seeking insurance. But that is not what insurance is all about. Premium from ULIPs constitute over 85 per cent of premium collections in the private sector, compared to less than one-third in the case of the LIC.
The private insurers focused on ULIPs because they had to make much smaller capital provisioning (solvency margins in insurance industry parlance) for such policies.
Also recall that the Indian stock market was booming when these companies came in. The private companies could initially gather a market share of more than one-third. But when the slowdown — in the stock markets and the wider economy — started in 2008-09, people started moving back towards the comfort of the LIC.
Selling an insurance policy is like issuing a promissory note. Credibility is critical in this business. The customer wonders whether the insurer will be around if and when a claim is made…
The ultimate yardstick to judge the performance of an insurance company is to see how quickly it settles claims. The LIC is perhaps the best in the world in this regard. It settles 99.86 per cent of the claims. In contrast, IRDA data reveals that in the last financial year, the private sector repudiated nearly 11 per cent of the claims. The regulator must address this issue immediately.
The average annual premium for a policy issued by the private insurers is about Rs.60,000, compared to Rs.9,000 for a policy issued by the LIC. This gives you an idea about the diversity in the LIC’s customer base. If the LIC is weakened, it may be forced to behave like a clone of the private insurers.
There are also complaints about mis-selling of life insurance. How has LIC fared?
The lapsation ratio (defined as the proportion of policies that lapse after the first year) of LIC in 2010-11 was five per cent, compared to 42 per cent in the case of an insurance company promoted by a large private bank. Another foreign insurer had a lapsation ratio of 72 per cent! On average, one-fifth of the policies issued by private insurers lapse after the first year. Policies lapse because the buyers, after paying the first premium, find that it does not suit their requirements. And, to make matters worse, the company can keep the money after misleading the consumer!
What will be the immediate consequences of increasing FDI to 49 per cent?
The Indian partners will have to divest a portion of what they now hold in favour of foreign entities. The IRDA’s rules stipulate that a company that has been in business for 10 years can go to the stock market to raise resources through an initial public offer. But the catch is that these companies are not earning profits yet.
My understanding is that the IRDA is pushing the industry towards consolidation. It is likely that the wider space given to foreign capital will hasten the process. That will mean less competition, not more.
The government has decided recently to allow the LIC to invest up to 30 per cent of the shares of listed corporate entities, which was earlier set at 10 per cent. How will affect the interest of policyholders?
The basic objective behind any investment is to secure a decent return to policyholders while ensuring the security of the policy monies.
LIC generates large investable funds every year and is a long-term investor. However, not many good scrips are available for investment. The 10 per cent ceiling was preventing the LIC from enhancing value for policyholders. We feel there should be some flexibility on this score. Of course, we are aware that the enhanced ceiling may pose risks because of the greater concentration of funds in a few companies. We feel the LIC should strengthen its internal mechanism on investment decisions.
The LIC should also not invest more than 10 per cent of its investable funds in equities. We are also opposed to the investment of policyholders’ funds in derivatives, which the IRDA is considering.
Is the AIIEA opposed to these measures because of the fear of job losses in the public sector?
For 10 years and more we have proved that we can compete effectively against these private companies. We lost market share initially, but we also regained it. This struggle is not about wages, jobs or about the narrow interests of the insurance workers. Our union believes that the unbridled entry of foreign capital into the insurance industry is harmful to the economic and social development of the country.
How effective has the AIIEA been in rolling back the reform process in the financial sector?
We understand that a trade union has its limitations. We know that the government is too powerful for us. Without public support we cannot push back these policies. That is why we collected more than 1.5 crore signatures from across the country when the insurance sector was opened up to private players. There is no other case of a union successfully pushing back the government’s reform agenda for almost 20 years, since the Malhotra Committee (1994) called for the privatisation of public sector insurance companies. We have appealed to all political parties to oppose the government’s move.