Financial Institutions/ Insurance

Opening the FDI floodgates

Print edition : February 05, 2016

At a medical camp conducted by a private general insurance company. The government's withdrawal as a provider of health services has coincided with the promotion of aggressive private health insurance policies. Photo: Nagara Gopal

Amanulla Khan. Photo: V. Sreenivasa Murthy

The lifting of the FDI cap in the sector has not increased insurance penetration and has only undermined the unique contributions made by public sector insurance companies.

That the pursuit of economic liberalisation is a mere fetish is well illustrated by the happenings in the insurance industry. It is this fetish that has resulted in the jettisoning of the greater common good and rendered policy devoid of an institutional memory that locates the current crisis in a historical perspective. The impact of this fetish on the public sector insurance industry—for decades synonymous with the business in India—illustrates how successive governments, in the name of pursuing “reforms”, have driven the pioneering publicly owned companies to the wall. All this has come at considerable social and economic costs, especially because it threatens to abandon what the Indian public sector insurance companies have achieved, uniquely, in the developing world.


And, as the war cries of the “reformers” drown voices of sanity, the most substantive rebuttal has come from the unions in the insurance industry, highlighting the enormous significance that trade unions have in a functional democracy. They have repeatedly stressed that what is at stake is not merely their pay, terms of employment or their working conditions, but also the future of the country if it is abandoned to the caprices of private (read foreign) insurers. Soon after the Narendra Modi government assumed office, it lifted the cap on foreign direct investment (FDI) in the insurance sector from 26 to 49 per cent. Those batting in favour of lifting the FDI cap argued that the inflow of foreign funds into private joint-venture insurance companies would result in the deepening of insurance penetration in the country. The implicit logic was that Indian partners in these joint ventures—in both the general insurance and life insurance segments—lacked adequate capital to drive insurance penetration. These arguments in favour of allowing a greater role for foreign insurers have been roundly and repeatedly rebutted by the insurance workers’ unions, most notably the All India Insurance Employees’ Association (AIIEA). As Amanulla Khan, president of the AIIEA, observed, the overwhelming proportion of the life insurance policies issued by the private insurers (more than 80 per cent) are unit-linked. It is important to recognise that the returns from such policies are linked to the performance of the stock markets, which have swung like a yo-yo after the initial euphoria of Modi being swept to office in 2014. Significantly, the question of a capital constraint for insurers who are focussed on selling such policies, would be superfluous.

LIC’s reliability

Insurance funds, especially those related to life, are ideally suited to support long-term projects such as those in the infrastructure segment. According to Amanulla Khan, the long-term commitment made by the purchaser of a life insurance policy enables the insurer to park funds in long-term projects because the probability of a claim arising from the policy is relatively slim. However, this advantage melts away in the case of a unit-linked policy because the associated risks are much greater in such polices. It is the Life Insurance Corporation of India’s (LIC) unique focus on the core elements of the life insurance business that has enabled it to not only act as a reliable insurance company (with a claim settlement ratio of more than 99 per cent, perhaps the best in the world) but also generate funds for investment in infrastructure. The recent case of the LIC’s MoU with the Indian Railways, which makes available to the railways funds to the tune of Rs.1.5 lakh crore over a five-year period, is a perfect example of how it is radically different from its private sector competitors.

If capital was the primary constraint hampering private Indian insurers from expanding their base, why is it that they have not approached the capital market? Clearly, the capital constraint is merely an excuse to allow foreign insurers to creep under the regulatory regime. The Indian experience of joint ventures involving private Indian companies in several sectors, ranging from automobiles to finance, is illustrative of how foreign partners use Indian enterprises primarily to get a toehold in the Indian market. It shows that once a beachhead has been occupied, the foreign partners have no further use for the Indian partner. There is no reason why it should be different with the insurance business. The fact that most of the Indian partners in insurance joint ventures are large industrial houses clearly does not augur well for the healthy growth of the industry because it violates the basic arm’s-length norms governing such businesses.

Several insurance joint ventures have already clambered on to the divestment bandwagon, enthused by the lifting of the FDI cap. HDFC Standard Life Insurance Company Ltd, the joint venture arm of Scottish insurer Standard Life and the Indian conglomerate HDFC, has already initiated such moves. The Foreign Investment Promotion Board (FIPB) recently approved a proposal to let HDFC divest 9 per cent of its stake in the joint venture, valued at $264 million (about Rs.1,750 crore). Although both partners have said they plan to make an initial public offering (IPO) later this year, the uncertainties of the market leaves this in some doubt. The two partners have also said they plan to hold a 35 per cent equity stake each in the joint venture after the IPO. Aviva Plc, another British insurer, which has a joint venture with Dabur, has also sought approval to increase its stake in its Indian joint venture, Aviva India.

Amanulla Khan feels vindicated by the way things have gone after the lifting of the FDI cap. “In cases where capital has come in or is being planned, they have not contributed to the expansion of the business, but only resulted in a payoff to the domestic partner.” He pointed out that most of the other Indian partners are only waiting for “better valuations and better market sentiments”. “Our repeated assertion that the lifting of the cap has nothing to do with the flow of additional capital to the business has been proved true,” he said.

These developments, triggered by the lifting of the FDI cap, imply that the Indian partners are merely the cat’s paws of the multinational insurance companies. It appears that the policy regime’s willingness to allow the Indian entities to “unlock value” is merely to develop a constituency that has a vested interest in further opening up the sector. Amanulla Khan notes that in every sector that has been opened up to foreign investment—such as telecom, media and several others—FDI limits have always been increased. “Foreign investors are unlikely to be satisfied with the 49 per cent cap. Sooner or later, they are bound to ask for more,” he said.

The enhanced limit on foreign investment is also aimed at increasing the profits that these companies can repatriate out of the country. The current economic slowdown has a critical bearing on the insurance business. This is particularly more pronounced in the case of general insurance, where the scale of business depends critically on how the businesses themselves are performing. Amanulla Khan argued for the urgent need to consolidate the four Indian public sector general insurance companies—National Insurance Company Ltd, Oriental Insurance Company Ltd, New India Insurance Company Ltd and United India Insurance Company Ltd.

General insurance in peril

The amendments to the insurance legislation make it possible for the government to sell its equity in the four general insurance companies. Amanulla Khan said that a divestment of stakes in these companies would be completely contrary to the logic of consolidating the four companies in order to enable them to remain competitive vis-à-vis the private players. Moreover, the social obligations of these companies are likely to suffer if the divestment happens, warned Amanulla Khan. He pointed out that none of the general insurance companies are making profits from underwriting; instead, most of their profits come from the investments they make. The AIIEA is planning to hold a convention in New Delhi on the issue of the consolidation of public sector general insurance companies during the forthcoming Budget session of Parliament.

Clones of private players?

Health insurance is one area in which the public sector insurance companies are offering a wide range of products. “As an employee in the insurance sector, I may be happy with the aggressive thrust of the health plans, but, as a social activist, I am worried that this is happening because of the government’s withdrawal as a provider of basic health services to its citizens,” said Amanulla Khan. He admitted that there was the danger of public sector insurance companies ending up as clones of their private sector competitors in their eagerness to remain competitive. “The danger is that once demand for such health insurance policies increase, the premium rates will also increase,” he said. Abandoned by a state that is unwilling to expand the reach and coverage of health services, large sections of people will be completely at the mercy of the private insurance companies. “The government is content with projection of health insurance as a substitute for public health programmes,” he remarked. It is this mindset that is driving the Union government to convert the Central Government Health Scheme, which has been in existence since 1954, into an insurance plan.

Amanulla Khan rued that the increased competition from private players was also forcing public insurers such as LIC to “rethink” their social obligations that have been a hallmark of their existence. The increased pressure on its margins is mainly responsible for this, he said. Although insurance penetration levels in India needs to progress much more, Amanulla Khan is proud of what has been achieved by LIC. The penetration of life insurance in India, at 3.1 per cent, compares quite favourably with 3.2 per cent in the United States, 2.9 per cent in Canada and 3.1 per cent in Germany.

Amanulla Khan argued that the Insurance Regulatory Authority of India (IRDA) has acted as a facilitator of the opening up of the insurance sector, rather than being a custodian of public interest. He pointed out that LIC had, in the last couple of years, been forced to “relaunch” its products, many of which have been in existence for many years. Since a relaunch of all its products was not possible, LIC had to cede space to its private competitors. Moreover, the solvency margins prescribed by the regulator have been unrealistically high, which has hurt the interests of public sector insurance companies. The average ticket size of a policy issued by LIC is about Rs.12,000 compared with Rs.60,000 in the case of private insurers. This was indicative of LIC’s reach, especially among the poorer sections, argued Amanulla Khan. The “lapsation” ratio of life policies, the ratio of policies that fail to get renewed at the end of the first year, is about 30 per cent for private insurers compared with just 5 per cent for LIC. The accompanying table shows that although the LIC’s share in total premium collections declined between 2013-14 and 2014-15, its share in the number of life policies issued increased. What this implies is that LIC, like a solid middle order batsman, has continued to perform the role of widening the reach of its services, even as private players have been adept at skimming the cream of the business.

The nearly two lakh employees in the public sector insurance companies are restive as they brace for further battles, after having stalled the liberal onslaught for over two decades. It has indeed been a creditable innings for the union, having resisted the challenge that was unleashed first by the Malhotra Committee, which called for the privatisation of the critical industry in 2004.

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