Dr Bhagwati Prakash Sharma
THE Union Cabinet, on October 4, has proposed to enhance the ceilings of foreign equity capital from 26 to 49 per cent in the insurance sector and from nil to 49 per cent in the pension sector. If approved by the parliament, the proposed move would expose the vast savings of masses of the country to increased risk, and lead to foreign control over the nation’s financial resources. The decision to throw open the twin financial sectors to the foreign players, who themselves are struggling for their survival in their home countries, needs to be stalled in Parliament.
To garner political support for the bill to enhance foreign equity ceiling in insurance, the Finance Minister has ostentatiously been claiming that the proposal would help to attract much needed capital, to the tune of $5–6 billion, for the insurance industry and increase insurance penetration in the country. The claims of Mr. Hari Narayan, the Chairman of the Insurance Regulatory and Development Authority (IRDA) are also equally ostentatious that insurance would attract Rs. 30,000 crores over next 5 years. Such claims are quite untenable because, the total equity capital in the combined life and non-life insurance could rise from Rs. 3186 crores to Rs. 29,938 crores over a decade between 2001-02 to 2010-11, wherein the foreign equity received from abroad is merely around Rs. 6000 crores. That too had come, because of a provision in the law, of allowing private entry in insurance, subject to having a joint venture partner with past experience in insurance business. So, every indigenous entrant, since 1999 was virtually compelled to have a foreign partner. Otherwise, many Indian players could enter independently and foreign equity would have been even lower. Still, there is one indigenous player, having no foreign partner in its venture. Thus, the hopes of attracting $ 5 – 6 billion being expressed by the Finance Minister are highly over-inflated, as the total cumulative investment in the entire insurance sector including the public sector is just $6 bn of which, mere $ 1.36 bn has come as FDI in the past 13 years, when the economy was booming at an all time high growth rate (even) between 8 to 10 per cent, and the insurance sector was growing at a rate of 25 to 30 per cent per annum. Now, when the growth projectious for 2012-13 are halved to 5-6 per cent, even by the Finance Minister himself and the insurance sector is facing deceleration, there are no chances of attracting even half of it. Moreover, the growth in the insurance sector has already began to experience an unprecedented decline after 10 years of a rapid growth-path, and foreign partners too have even begun to exit.
New business revenue in life insurance has already declined by 14% in 2011-12. Sensing a further fall, New York life has already exited from Max-New York Life. Majority of the players are even diverting to other businesses, because of protracted losses. ICICI Life has suffered a loss of Rs. 2710 crore in 2010 – 11 and 1808 crores in 2011-12, HDFC-Life Rs. 1734 crore in 2010-11 and Rs. 1354 crores in 2011-12, Birla Sunlife Rs. 1722 Crore in 2010-11 and Rs. 1376 Crore in 2011-12, Avaiva Rs. 1478 Crore in 2010-11 and Rs. 1150 crore in 2011-12, ING Life Rs. 1190 crore in 2010-11 and Rs. 757 crore in 2011-12, Future Generali Rs. 966 Crore in 2010-11 and 189 crore in 2011-12 and Bharti Axa Rs. 1558 Crore in 2010 -11 and 1748 crore in 2011-12. The industry that grew at a growth rate of 30 % p.a. for 7-8 years is now experiencing contraction since last one year. The life insurance has become half attractive. Moreover, there is no relevance to talk of getting any substantial quantum of funds as foreign capital, since only a small fraction of equity in the insurance sector holds control over vast financial resources of the masses of the country. The overall ratio of equity to assets under control of insurance companies is just miniscule, amounting to 1.7 per cent in case of life, most vulnerably exposing it to high chance of insolvency. Overall, a capital base of mere Rs. 29,938 crores in insurance is controlling more than Rs. 15 lac crores. Thus, the insurance companies can opt, at their whims, to invest the savings of vast masses, in high risk bearing and speculative stock markets as well as to fund the infrastructure development, with defined and assured return for the policy holders. But, the tendency to profiteer by exposing the insured to higher risk in the life insurance segment, is on the rise among the foreign players. Share of hybrid investments such as unit-linked insurance plans, which involve market investments with higher returns for the insurer and higher cost and greater risk for the insured, has grown from nil in 2000 to 28 per cent in 2010-11 after the entry of the foreign players in India as well. Further opening up of the insurance sector for foreign players would enhance the import of insurance practices as well as, the offers of the products and schemes that may subject the savings of masses, to increased probability of loss by enticing them into investing in new schemes that would be opaque with higher risk.
For this reason alone, people have been displaying less faith in foreign equity controlled private sector, vis a vis the public sector. During the year 2009-10, the 23 foreign controlled private sector life insurance companies could register a growth of mere 13 per cent vis a vis 31 per cent growth of LIC. As per the 2010-11 annual report of the IRDA, the ‘first year premium’ and the ‘regular premium’ underwritten by LIC was Rs. 87,012 crores and Rs.36,265 crores respectively against mere Rs.39,368 crores and Rs.27,664 crores underwritten by the 23 private sector companies. Indeed, people are getting scared away from the private insurers (with foreign partners), because of relatively poor record of claims settlement, which is an important criterion of reliability of an insurance company. This poor record of claims settlement is clearly reflected in the poor market share of the private players having foreign partners, importing the one-sided pro-profit practices from abroad. This can be seen from the tables no 1 and 2, depicting the claims settlement record and premiums underwritten by the public and private sector companies in life insurance.
Further opening up of the insurance sector for foreign players would lead to mushrooming growth of unscrupulous foreign companies, who in their efforts to rapidly expand their business volumes, and to garner higher profits, might underprice the (insurance) contracts, invest these funds in high- company of the world, had to be bailed out with a $ 170 billion bailout package by the US govt. in 2008.
Moreover, the insurance at present, accounts for around 6 percent of the economy and pension contribution for much less than 1 percent of the GDP. The growing income and job insecurity, rising cost of health care and decline in overall financial security, would generate faster growth in these two sectors. Insurance and Pension sector both would grow at double the present rate. In that case more than 15 lakh crores might be mobilized by these twin sectors every year in 2017 and onwards, against a likely capital base (of all Indian and foreign insurers) not exceeding more than Rs. 45,000 crores. Which, otherwise could be used in infra-structure and developmental funding, as was being done by the indigenous insurance companies. But, the foreign players might divert their funds to high risk based and speculative avenues in the hope to reap more profits. To the contrary, today, the LIC commands more than Rs. 13 lakh crores at its disposal and funds a wide variety of development needs from infrastructure development to sovereign borrowings.
The cabinet decision of October 4, also envisages to allow foreign players in the reinsurance business as well in the country, which is hitherto, largely going to the GIC in India. The cabinet has also proposed to halve the minimum capital requirement for a stand-alone health insurance company to Rs. 50 crores from Rs. 100 crores. It would pave the way for unscrupulous health insurance companies, leading to unviable ventures, likely to go sublime with the money of poor masses likely to be insured by them in India. The M.Ps. in Parliament should therefore stall these bills in national interest.
Table 1
Claim Settlement Record of Public Sector and Private Sector
(In %)
LIC All 23 foreign con
trolled Private sector
companies*
Claims Paid 97.09 86.04
Claims Repudiated 1.00 8.90
Claims Written back at
the end of the year 0.51 0.05
Claims Pending at
the end of the Year 1.46 5.01
*Only one private sector company does not have a foreign partner
Source: IRDA report
Table 2
Total Premium Under written (2010-11)
(In Rs. Crores)
LIC All 23 foreign
controlled Private
sector Companies
having foreign
capital and partner*
Regular Premium 36265.36 27,664.19
Single Premium 50,746.99 11,704.46
First Year Premium 87,012.35 39,368.65
Renewal Premium 1,16461.05 48,762.94
Total Premium 2,03,473.40 88,131.60
*Only one private sector company does not have a foreign partner
Source: IRDA report
Dr Bhagwati Prakash Sharma
THE Union Cabinet, on October 4, has proposed to enhance the ceilings of foreign equity capital from 26 to 49 per cent in the insurance sector and from nil to 49 per cent in the pension sector. If approved by the parliament, the proposed move would expose the vast savings of masses of the country to increased risk, and lead to foreign control over the nation’s financial resources. The decision to throw open the twin financial sectors to the foreign players, who themselves are struggling for their survival in their home countries, needs to be stalled in Parliament.
To garner political support for the bill to enhance foreign equity ceiling in insurance, the Finance Minister has ostentatiously been claiming that the proposal would help to attract much needed capital, to the tune of $5–6 billion, for the insurance industry and increase insurance penetration in the country. The claims of Mr. Hari Narayan, the Chairman of the Insurance Regulatory and Development Authority (IRDA) are also equally ostentatious that insurance would attract Rs. 30,000 crores over next 5 years. Such claims are quite untenable because, the total equity capital in the combined life and non-life insurance could rise from Rs. 3186 crores to Rs. 29,938 crores over a decade between 2001-02 to 2010-11, wherein the foreign equity received from abroad is merely around Rs. 6000 crores. That too had come, because of a provision in the law, of allowing private entry in insurance, subject to having a joint venture partner with past experience in insurance business. So, every indigenous entrant, since 1999 was virtually compelled to have a foreign partner. Otherwise, many Indian players could enter independently and foreign equity would have been even lower. Still, there is one indigenous player, having no foreign partner in its venture. Thus, the hopes of attracting $ 5 – 6 billion being expressed by the Finance Minister are highly over-inflated, as the total cumulative investment in the entire insurance sector including the public sector is just $6 bn of which, mere $ 1.36 bn has come as FDI in the past 13 years, when the economy was booming at an all time high growth rate (even) between 8 to 10 per cent, and the insurance sector was growing at a rate of 25 to 30 per cent per annum. Now, when the growth projectious for 2012-13 are halved to 5-6 per cent, even by the Finance Minister himself and the insurance sector is facing deceleration, there are no chances of attracting even half of it. Moreover, the growth in the insurance sector has already began to experience an unprecedented decline after 10 years of a rapid growth-path, and foreign partners too have even begun to exit.
New business revenue in life insurance has already declined by 14% in 2011-12. Sensing a further fall, New York life has already exited from Max-New York Life. Majority of the players are even diverting to other businesses, because of protracted losses. ICICI Life has suffered a loss of Rs. 2710 crore in 2010 – 11 and 1808 crores in 2011-12, HDFC-Life Rs. 1734 crore in 2010-11 and Rs. 1354 crores in 2011-12, Birla Sunlife Rs. 1722 Crore in 2010-11 and Rs. 1376 Crore in 2011-12, Avaiva Rs. 1478 Crore in 2010-11 and Rs. 1150 crore in 2011-12, ING Life Rs. 1190 crore in 2010-11 and Rs. 757 crore in 2011-12, Future Generali Rs. 966 Crore in 2010-11 and 189 crore in 2011-12 and Bharti Axa Rs. 1558 Crore in 2010 -11 and 1748 crore in 2011-12. The industry that grew at a growth rate of 30 % p.a. for 7-8 years is now experiencing contraction since last one year. The life insurance has become half attractive. Moreover, there is no relevance to talk of getting any substantial quantum of funds as foreign capital, since only a small fraction of equity in the insurance sector holds control over vast financial resources of the masses of the country. The overall ratio of equity to assets under control of insurance companies is just miniscule, amounting to 1.7 per cent in case of life, most vulnerably exposing it to high chance of insolvency. Overall, a capital base of mere Rs. 29,938 crores in insurance is controlling more than Rs. 15 lac crores. Thus, the insurance companies can opt, at their whims, to invest the savings of vast masses, in high risk bearing and speculative stock markets as well as to fund the infrastructure development, with defined and assured return for the policy holders. But, the tendency to profiteer by exposing the insured to higher risk in the life insurance segment, is on the rise among the foreign players. Share of hybrid investments such as unit-linked insurance plans, which involve market investments with higher returns for the insurer and higher cost and greater risk for the insured, has grown from nil in 2000 to 28 per cent in 2010-11 after the entry of the foreign players in India as well. Further opening up of the insurance sector for foreign players would enhance the import of insurance practices as well as, the offers of the products and schemes that may subject the savings of masses, to increased probability of loss by enticing them into investing in new schemes that would be opaque with higher risk.
For this reason alone, people have been displaying less faith in foreign equity controlled private sector, vis a vis the public sector. During the year 2009-10, the 23 foreign controlled private sector life insurance companies could register a growth of mere 13 per cent vis a vis 31 per cent growth of LIC. As per the 2010-11 annual report of the IRDA, the ‘first year premium’ and the ‘regular premium’ underwritten by LIC was Rs. 87,012 crores and Rs.36,265 crores respectively against mere Rs.39,368 crores and Rs.27,664 crores underwritten by the 23 private sector companies. Indeed, people are getting scared away from the private insurers (with foreign partners), because of relatively poor record of claims settlement, which is an important criterion of reliability of an insurance company. This poor record of claims settlement is clearly reflected in the poor market share of the private players having foreign partners, importing the one-sided pro-profit practices from abroad. This can be seen from the tables no 1 and 2, depicting the claims settlement record and premiums underwritten by the public and private sector companies in life insurance.
Further opening up of the insurance sector for foreign players would lead to mushrooming growth of unscrupulous foreign companies, who in their efforts to rapidly expand their business volumes, and to garner higher profits, might underprice the (insurance) contracts, invest these funds in high- company of the world, had to be bailed out with a $ 170 billion bailout package by the US govt. in 2008.
Moreover, the insurance at present, accounts for around 6 percent of the economy and pension contribution for much less than 1 percent of the GDP. The growing income and job insecurity, rising cost of health care and decline in overall financial security, would generate faster growth in these two sectors. Insurance and Pension sector both would grow at double the present rate. In that case more than 15 lakh crores might be mobilized by these twin sectors every year in 2017 and onwards, against a likely capital base (of all Indian and foreign insurers) not exceeding more than Rs. 45,000 crores. Which, otherwise could be used in infra-structure and developmental funding, as was being done by the indigenous insurance companies. But, the foreign players might divert their funds to high risk based and speculative avenues in the hope to reap more profits. To the contrary, today, the LIC commands more than Rs. 13 lakh crores at its disposal and funds a wide variety of development needs from infrastructure development to sovereign borrowings.
The cabinet decision of October 4, also envisages to allow foreign players in the reinsurance business as well in the country, which is hitherto, largely going to the GIC in India. The cabinet has also proposed to halve the minimum capital requirement for a stand-alone health insurance company to Rs. 50 crores from Rs. 100 crores. It would pave the way for unscrupulous health insurance companies, leading to unviable ventures, likely to go sublime with the money of poor masses likely to be insured by them in India. The M.Ps. in Parliament should therefore stall these bills in national interest.
Table 1
Claim Settlement Record of Public Sector and Private Sector
(In %)
LIC All 23 foreign con
trolled Private sector
companies*
Claims Paid 97.09 86.04
Claims Repudiated 1.00 8.90
Claims Written back at
the end of the year 0.51 0.05
Claims Pending at
the end of the Year 1.46 5.01
*Only one private sector company does not have a foreign partner
Source: IRDA report
Table 2
Total Premium Under written (2010-11)
(In Rs. Crores)
LIC All 23 foreign
controlled Private
sector Companies
having foreign
capital and partner*
Regular Premium 36265.36 27,664.19
Single Premium 50,746.99 11,704.46
First Year Premium 87,012.35 39,368.65
Renewal Premium 1,16461.05 48,762.94
Total Premium 2,03,473.40 88,131.60
*Only one private sector company does not have a foreign partner
Source: IRDA report
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