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.
sridhar.v@thehindu.co.in
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