It is imprudent to allow foreign capital greater access to and control over domestic savings, says Amanullah Khan, president, All India Insurance Employees Association.
AMANULLAH KHAN is the president of the All India Insurance Employees Association (AIIEA), a trade union with 1.5 lakh members drawn from employees of public sector insurance companies. These companies include the Life Insurance Corporation of India, National Insurance Company Limited, The New India Assurance Company Limited, The Oriental Insurance Company Limited, United India Insurance Company Limited and the General Insurance Corporation of India. The GIC is the sole reinsurance company in the Indian insurance market.
In an interview given to Frontline in Bangalore, Amanullah Khan discussed the implications of the proposed move to raise the foreign direct investment (FDI) limit in the Indian insurance sector to 49 per cent from the current 26 per cent. Excerpts:
You have made it clear that the AIIEA is opposed to any move to increase the FDI limit in the Indian insurance sector through the passage of the Insurance Laws Amendment Bill, 2008. Can you explain why such a stand has been taken?
The AIIEA strongly opposes the FDI hike because the decision to increase the foreign equity limit has been taken to placate and win the confidence of international finance capital. It will neither benefit the Indian economy nor bring any benefit to the insuring public. Insurance, especially life insurance, mobilises small savings of the people for long-term investments. It is therefore imprudent to allow foreign capital greater access to and control over domestic savings.
The UPA [United Progressive Alliance] government is making all efforts to liberalise the financial sector and place it in the architecture of global finance capital because of pressure from governments of the Western world such as the United States, France, Germany and the United Kingdom. The financial sector plays a very important role in the national economy. The AIIEA strongly believes that the so-called insurance reforms, the Pension Fund Regulatory and Development Authority (PFRDA) Bill and the Banking Laws Amendment Bill will harm the national economy. India weathered the 2008 global recession because the regulations here did not allow it to deal with derivatives. But if it fully integrated with international capital, it will not be insulated.
Finance Minister P. Chidambaram has stated that it is necessary to increase FDI in the insurance sector as the benefits will go to the private sector insurance companies, which require huge amounts of capital infusion. Do you agree with this statement?
No, I do not agree with his statement at all. It is not true that private companies are starved of capital for their expansion. The 23 private companies in the life insurance sector and the 18 companies in the general insurance sector have been operating across the country for the past 10 years. Together, they have more offices than the public sector units. These companies have been promoted by big industrial and financial houses that have abundant resources at their command. They also have the option of raising capital through initial public offers (IPO).
The Parliamentary Standing Committee on Finance, headed by former Finance Minister Yashwant Sinha, has also held that there is no case for increasing the FDI limit and that the insurers can look to the domestic market if they need additional capital. Unfortunately, the unanimous recommendation of the committee has not been accepted by the government.
What about the argument that the opening up of the insurance sector will enable the flow of high-premium income into India?
The argument that the opening up of the insurance sector to foreign capital will enable the flow of a significant portion of global premium income earned by the foreign partners of private companies into Indian infrastructure has not been proved right. There has been no evidence in the last decade to suggest that the foreign partners brought any global premium earned by them to India. To say that they are suddenly going to bring in capital now is an absolutely hollow claim. The total capital employed by foreign partners as at the end of March 2011 in the insurance sector was just Rs.6,650 crore. There is no justification to allow greater access to foreign capital on the premise that large FDI flows will take place. You cannot make development hostage to foreign capital when there are local resources. Foreign companies will bring in some capital, but only to mobilise domestic savings.
The government itself has expressed concern that the private companies have not made any significant investments in infrastructure as the share of the LIC alone in the total infrastructure investments made by insurance companies is nearly 90 per cent. You must remember that no foreign company is going to invest in India out of a sense of altruism. They are all out to invest for profit, and to expect that foreign capital inflow will develop the Indian insurance sector and economy is unwise. FDI is a very poor substitute for domestic savings.
Arguments in favour of a hike in FDI claim that it will give the much-needed boost to the Indian insurance industry. Perhaps it is pertinent to ask here how the Indian insurance industry has fared in the past few years through adverse economic conditions.
The insurance industry in India has done well even in times of adverse economic conditions, like in the past few years when financial savings and domestic savings have dipped. Life insurance penetration is 4.4 per cent in India according to 2010 data from the PFRDA. This is much better than the levels obtaining in the U.S., Canada and Germany. This is also remarkable considering the low income levels in India.
Today India ranks eighth globally in the volume of life insurance premium earned. The general insurance industry is also doing well and is making steady improvement in penetration levels.
The insurance industry in India was opened up for private participation in 1999 when domestic players were permitted to enter the sector in partnership with foreign insurance companies. Since then, a number of major business houses in India have entered the insurance business. Have public sector insurance companies such as the LIC managed to retain their market leadership through the past decade when they competed with private insurance companies?
Well, you will find it interesting that the growth of the life insurance industry is driven by the state-owned LIC. Even after 10 years of competition, it holds a market share of 76 per cent in premium income and 81 per cent in the number of policies, according to figures available at the end of August 2012.
Efforts to weaken the LIC have been thwarted as it enjoys total confidence of the insuring public. It services over 30 crore individual policy holders and another 10 crore group policy holders. The LIC is the biggest life insurer in the world in terms of the number of policies serviced and claims settled. The hike in FDI is another attempt to weaken the LIC and the public sector general insurance companies.
What about the argument made by supporters of the Bill that the FDI hike will benefit policyholders? Will it bring in advanced technology?
It is a myth that an FDI hike will benefit policy holders. What is the record of the private companies as documented by the Insurance Regulatory and Development Authority [IRDA]? The average claim settlement by the private companies is around 80 per cent as against 99.86 per cent by the LIC. The private companies have repudiated [dishonoured a claim] 10 per cent of the death claims as against less than 1 per cent by the LIC.
Secondly, the lapsation ratio [the ratio of the number of policies that lapse during a period to the total number of policies written at the beginning of that period] of policies in the private companies is alarmingly high. There are companies where the lapsation ratio is as high as over 50 per cent. The lapsation ratio of the LIC is just around 5 per cent. There is consensus that the private companies are making profits because of such high lapsation of policies. Therefore, to say that privatisation or FDI hike will benefit policy holders is totally untrue.
Also, private insurance companies in India have been concentrating on the rich and the super-rich. This is evident when you compare the ticket size [size of an insurance policy] and the premium between private and public sector companies.
And this talk of advanced technology is also not valid. Nobody can argue against the fact that the LIC has the highest levels of technology in the country. A product-utilising technology has to be developed locally, based on the needs of the people. So it is wrong to think that foreign companies can develop products for India.
Along with the hike in FDI in the insurance sector, the Union government also intends to increase FDI in pension funds to 49 per cent. What is the AIIEAs stand on this?
The AIIEA is opposed to the PFRDA Bill. The government wants to privatise pension funds. In a country that has no social security for the vast majority, it should be the responsibility of the state to run a social security scheme. Foreign participation in pension funds is dangerous. What happened in the U.S. and other Western countries cannot be ignored. The speculative games that insurance companies and pension providers played in those countries caused havoc on the savings of pensioners. India cannot afford to hand over the social security savings of its people to the same speculative forces.
There is also a proposal to permit public sector general insurance companies to tap capital markets for capital requirement. What does the AIIEA think of this?
The proposal to permit public sector general insurance companies to tap the capital markets for capital requirement is not acceptable to the AIIEA. This simply means privatisation of the best and profitable public sector units. The GIC and the four public sector general insurance companies have more than Rs.100,000 crore in investments and nearly Rs. 30,000 crore in reserves. They are adequately capitalised and do not need any additional infusion of capital in the foreseeable future. In case of need, they can generate capital through internal resources. There is absolutely no need to privatise these companies.
All these proposals are slated to come up for discussion in Parliaments winter session. What is the AIIEA doing to mobilise support to its fight against the proposals?
It is because of the efforts of the AIIEA that the foreign equity limit was restricted to 26 per cent in 1999. Even this time, the AIIEA is determined to oppose the government decision. We are going to intensify our campaign.
The AIIEA has decided to mobilise public and political opinion against these policies. It has also decided to observe a nationwide strike if the government brings the Insurance Laws Amendment Bill, 2008, in Parliament for approval.
The AIIEA appeals to the political parties and progressive sections of the people to support its struggle. It is clear that the Union government is not going to have it easy in Parliament.