Insurance Sector

Premium on trust

Print edition : November 02, 2012

SUNIL B. MITTAL of Bharti and Les Owen of Axa Asia Pacific Holdings after signing the agreement.-KAMAL NARANG

The public sector continues to dominate the insurance market in terms of penetration and outreach and it is certainly far ahead of the private players in meeting the social obligations of the insurance sector.

MORE THAN A DECADE AFTER THE LIBERALISATION OF the insurance sector in 1999 and the entry of private players, the public sector continues to be the most significant player, in terms both of market share and penetration. The recent Cabinet decision to liberalise the insurance sector further and raise the cap on foreign direct investment (FDI) from 26 per cent to 49 per cent is premised on the assumption that privatisation has led to an expansion of the sector. However, an empirical analysis of the performance of the players across the sector shows that the public sector has a considerably better record of timely settlement of claims and outreach and of meeting the social obligations of insurance.

The United Progressive Alliance (UPA) government has put forward a series of arguments for further liberalisation of the insurance sector. These include the need to increase the degree of penetration and density of insurance in the country, mobilisation of much-needed investments, including foreign capital, for Indias infrastructure needs. Speaking at the recently organised Economic Editors Conference in New Delhi, Union Finance Minister P. Chidambaram said, At present, the penetration of insurance, measured by total premium as proportion of GDP [gross domestic product], is only 4.4 per cent in the life insurance segment and 0.76 per cent in the non-life insurance segment. In a population of 120-crore plus, a very small number of people have insurance. The FDI cap of 26 per cent must be raised and additional capital brought in to facilitate the faster spread of insurance. The insurance companies are in need of additional capital to expand their operations.

AVIVA HEADQUARTERS in London. Aviva and Dabur Group formed Aviva Life Insurance.-BLOOMBERG NEWS

The easy correlation being made by the government between bringing in foreign capital and extending the benefits of insurance to a larger segment of the population needs to be questioned. The ultimate motive of any private enterprise being making profits, it is doubtful to what extent easing the norms for the entry of private players will help in meeting the social objectives of insurance. The liberalisation drive looks at insurance merely as an industry and not as an organised means to secure the future for the people of a country where the state does not provide any social security cover.

Going ahead with its drive towards liberalisation in the 1990s, the government set up a committee under the chairmanship of R.N. Malhotra, former Governor of the Reserve Bank of India, to introduce reforms in the insurance sector. The Malhotra Committee recommended that private players be allowed in the insurance sector (see box).

In the government narrative of the expansion of the segment through liberalisation, the remarkably better performance of the public sector in terms of settlement of claims and timely payment of the sum assured is completely overlooked. Insurance, as an industry, is ultimately based on the faith reposed by the customer in the insurance company to give him a return on the sum insured in times of crisis. Therefore, the success of an entity in the industry needs to be examined in terms of record of claims settlement, the steps it has taken to prevent lapsation of policies, and how hassle-free its procedures are for making payments.

AT THE LAUNCH of Future Generali India life insurance company's endowment plan in Hyderabad.-P.V. SIVAKUMAR

As per the 2010-11 annual report of the Insurance Regulatory Development Authority (IRDA), the total regular premium underwritten by the LIC stood at Rs.36, 265.36 crore while the total premium of the private players combined stood at Rs.27,664.19 crore (see Table 1).

The public sector continues to dominate the market in terms both of penetration and outreach. Speaking to Frontline, G. Anand, general secretary of the All India Insurance Employees Association (South Zone), explained how the public sector was more proactive in meeting its social obligations, The LIC alone has about 2,700 branches in India. The public sector insurance companies are planning to come up with 1,000 micro offices in Tier 3 cities and small villages so as to increase the number of people who are insured.

Anil Kumar Bhatnagar, general secretary of the Insurance Employees Association (Northern Zone), highlighted the achievements of the LIC: The LIC services 30 crore policies. The company paid a dividend of Rs.1,138 crore to the government in 2010-11. The total income from premiums is Rs.2.03 lakh crore and the LIC has assets worth Rs.13.17 lakh crore. The lapsation rate of policies in the LIC is only 5 per cent. In fact, 25 per cent of the government borrowing is serviced by the LIC. We have a network of 13.5 lakh insurance agents spread across the country who facilitate insurance.

THE OFFICE BUILDING of the American International Group in New York.-AP

The free rein given to private insurers poses the risk of private players garnering windfall gains by investing their money in the stock market instead of contributing to the infrastructure needs of the country as envisaged by the government. Anand explained, There is a pending proposal to allow full capital account convertibility to the private companies whereby the savings premiums gained by the foreign companies can actually be routed back to their own country. Some of these companies can also invest 100 per cent of the amount in the share market, and given the volatility of financial markets in these times of economic downturn, that puts peoples money at risk.

Claim settlement

The settlement of claims is an important marker of the reliability of an insurance company. On this count too, the public sector stands out. Table 2 provides a comparison between the private sector and the public sector in terms of claim settlement and repudiation of claims. It is significant to note that the percentage of claims repudiated by the private sector (8.9 per cent) is much higher than the percentage for the public sector (1 per cent). This casts doubts on the reliability of private entities in the matter of settlement of claims.

Even in the non-life insurance sector, the total market share of the four public sector entitiesNational Insurance, New India Insurance, Oriental Insurance, and United Insuranceis much higher than that of the 18 private sector players combined. The total market share of public sector non-life insurance companies in 2010-11 stood at 59.07 per cent, while the combined total market share of the private non-life insurance companies stood at 40.93 per cent.

Third party insurance

An instance of the pitfalls of professionalising the insurance sector is evident in the manner in which the provisions for a third-party insurance pool for motor vehicles to be provided compulsorily by the private players was diluted earlier this year. A third-party insurance is a policy under which a company agrees to compensate the insured person if he is sued for injuries or damages done to a third party in the event of an accident. In India, third-party insurance is compulsory for all motor vehicles. The beneficiary of third-party insurance is the injured third party, and the insured, or the policy holder, is only nominally the beneficiary. The money is supposed to be paid directly by the company to the third party. Since third-party insurance is a loss-making venture, a third-party motor pool was started in 2007, whereby losses from third-party insurance would have to be distributed to all general insurers on the basis of market shares.

Anand said that this pool was diluted and replaced by a declined risk pool. The third-party motor pool was dismantled earlier this year, which makes claims settlement in case of accidents more complicated. The Motor Vehicles Act makes third-party insurance compulsory. Still, some of the private companies are trying to go in for out-of-court settlements instead of paying the insured amount.

This is a clear instance of professionalisation defeating the core principles of insurance as a mechanism for common people to combat crisis situations.

In the realm of health insurance, there are concerns that third-party administrators inflate bills, thereby putting the consumer at a disadvantage.

Although the IRDA report says that the private players are meeting their stipulated rural and social sector obligations, a look at the distribution of offices in the life insurance segment suggests that the number of public sector insurance companies operating in rural and semi-urban areas is much larger even 10 years after liberalising the segment. The UPA governments claims that liberalising the FDI norms further will lead to an expansion of the sector needs to be questioned on this count, too. The pie chart shows the geographical distribution of offices of the LIC and the private players.

The spread of the public sector in the rural areas is much higher than that of the private players, even 10 years after the liberalisation of the sector. These figures fly in the face of the governments argument that further infusion of foreign capital will translate into expansion of services, particularly to rural areas, which are in dire need of insurance. The consolidation and strengthening of the insurance segment has largely been brought about by the public sector. The limited outreach of the private players and the ethical concerns arising from wholesale professionalisation of the insurance sector illustrate the severe limitations in thinking about the future of the sector without factoring in the consumers point of view.

In a paper titled Insurance Industry in India: A decade after liberalisationway ahead, Amanulla Khan, the president of All India Insurance Employees Association, cautions against the risks of giving a free rein to global capital, especially in times of financial crisis. The impressive performance of insurance industry in the last decade is being interpreted as the success of neoliberal policies. This is hardly true. The global financial crisis impacted the insurance companies in the United States and the other industrialised nations in an adverse manner. A number of insurance companies had to be bailed out by the government and the AIG bailout was the biggest of them all, he says .

A pro-people approach to insurance will require further strengthening of the already strong network of agents and field workers of the public sector institutions, which are built on the principles of faith and goodwill. Any expansion of the sector will have to honour these foundational principles.

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