Reverse gear

Print edition : August 22, 2014

An advertisement for a life insurance company. Life insurance currently covers 3.1 per cent of the population. Photo: Arunangsu Roy Chowdhury

An LIC hoarding in New Delhi. Even years after the entry of foreign players, LIC enjoyed a 75 per cent market share of the total first premium earnings mobilised by all the insurers in 2013-14. Photo: PTI

The BJP reverses its earlier opposition to allowing more foreign investment in the insurance sector and this may well jeopardise the country’s economic security.

THE Narendra Modi government’s gloves came off on July 24, after a brief honeymoon, when the Cabinet Committee on Economic Affairs decided to lift the cap on foreign players’ investment in Indian insurance companies from 26 to 49 per cent. The move is a reversal of the Bharatiya Janata Party’s (BJP) earlier position on the issue when it opposed the United Progressive Alliance (UPA) government’s attempts to achieve the same objective. The All India Insurance Employees’ Association (AIIEA), the main union which represents the interests of more than 2.4 lakh persons employed in the industry, has already signalled its determination to resist the move.

The AIIEA, which has a reputation for responsible trade unionism, with a strong commitment to work ethic while being a steadfast upholder of employees’ interests, has reached out to political parties across the spectrum in order to thwart the move. “Our opposition to the move is not merely about our jobs but about what is in store for Indians if and when the insurance industry is dominated by foreign capital,” says Amanulla Khan, president, AIIEA.

Of course, the business community, by and large, chooses to see the move in a different light. It sees the government’s initiative as the first in a series of “signals” to foreign investors of its resolve to aggressively push forward the reform agenda. Those welcoming the move argue that the Indian insurance industry, which is starved for funds, will be able to deepen and widen its reach in the country. The inflow of foreign funds, they say, will enable the expansion of Indian joint ventures with their foreign partners. Implicit in this logic is the assertion that the Indian partners in insurance ventures—both in the life insurance and general insurance —do not have the resources to invest in the expansion of the business.

The element of trust

This viewpoint, however, is not only flawed but fails to address a number of significant issues that have repeatedly cropped up since India began its dalliance with foreign capital in the insurance sector in the 1990s. To begin with, insurance is, by definition, a long-term affair. Unlike most other products, an insurance policy that is “sold” today does not result in immediate tangible gains to the buyer. The test of the efficacy of an insurance product happens only when the policy matures or the purchaser makes a claim based on the policy. Thus, the price of the policy is only one of the factors a prospective purchaser considers when evaluating sellers.

The “track record” of an insurance company is one of the most critical factors that a prospective customer considers before buying an insurance policy. The crucial word thus is “trust”, not “price”. Is it not striking that most advertisements for insurance products focus strongly on emotive appeal that is aimed at massaging the mind to repose its “trust” in the advertiser’s product? That the Life Insurance Corporation (LIC), a publicly owned company, too does this only shows that it has been forced to ape its rivals in the private sector.

Now some figures. Last year (2013-14), the LIC enjoyed a 75 per cent market share of the total first premium earnings mobilised by all the insurers in the life insurance business, amounting to Rs.90,000 crore. A notable feature of life insurance policies sold by private insurers is that about 80 per cent of the policies are unit-linked, implying that returns to the investor are closely tied to the performance of the stock markets, surely not the idea of insurance for an average Indian.

But even more striking was the fact that last year the LIC had a market share of more than 84 per cent of all the life insurance policies sold in India, implying that the average ticket of the policies it sold was smaller than those of its private sector rivals. It also implies that the LIC was more effective in widening the reach of life insurance in the country, which is one of the key arguments of those advocating greater play for private and foreign companies in the business!

Spurious reasoning

Anyone with a basic understanding of corporate law will know that the proposed increase of foreign investors’ stake to 49 per cent will not enable them to control the Indian joint venture. So, why would they bring in more capital if they cannot have a greater say? Amanulla Khan, like many others, believes that the proposed increase in FDI is meant to allow the Indian entities to liquidate a portion of their stake and earn profits that would be several multiples of their original investment. Amanulla Khan asks an interesting question: “How come none of the Indian insurance joint ventures has thought of launching an Initial Public Offering (IPO) to raise capital, if that was their major constraint?” This question is particularly significant given the remarkable upward climb of the Indian stock markets after the Narendra Modi government assumed office.

Moreover, the argument that Indian insurance ventures are starved of capital is belied by other data, which do not reveal a clear relationship between their capital base and the extent of their business. For instance, the private insurance company Bajaj Alliance had a total capital base (including reserves) of Rs.4,844 crore at the end of March 2013; it earned Rs.6,893 crore through the sale of premiums during the year, implying that its earnings were 1.42 times its capital base. Now, compare the Bajaj Alliance case with that of Bharati AXA, which earned Rs.745 crore as premiums but had a capital base of almost Rs.2,000 crore in the same year. HDFC Standard, with a capital base of only Rs.2,204 crore, earned more than five times its capital base during the same year. These three cases illustrate that an expansion of the capital base of insurance companies does not automatically result in an expansion of business.

Other critics of the move to hike the FDI limit argue that it is aimed at widening the exit window for foreign partners to repatriate profits. A senior official employed with a public sector general insurance company pointed out that Indian insurance legislation limited the proportion of earnings that companies can charge as expenses, which also included profits.

“The increase in the FDI limit will increase the amount of profit they can repatriate overseas,” he observed. He also pointed out that a significant portion of the general insurance business that was targeted at large corporates was “reinsured”. Since the risk in such policies is large, they are reissued to large multinational reinsurers such as Munich Re, Swiss Re or Hanover Re. But the transfer of risk to a bigger insurer obviously means that the Indian entities’ capital provision (which is determined by the extent of risk taken) comes down, pointed out the insurance company official quoted earlier. Across the world, the general insurance business is intimately linked to the nature and pace of economic growth. The industrial and economic slowdown in India and the high inflationary expectations that accompany it do not “indicate a buoyant environment for insurance at present,” he added. “The motive for increasing FDI in insurance obviously lies elsewhere”, he quipped.

Insurance, unlike manufacturing, is not heavily capital intensive, argues Amanulla Khan. He rebuts the argument that the binding factor hindering the growth of the Indian insurance industry is the shortage of capital by pointing out that the regulatory framework (governed by the Insurance Regulatory and Development Authority) has been set too tightly and rigidly. The high solvency margins, he says, has been deliberately set high to justify the need for capital infusion. In a recent letter to Congress president Sonia Gandhi urging her to support the union’s cause, he pointed out that most of the Indian partners of the 50-odd insurance companies currently operating are linked to large Indian industrial houses which do not suffer a resource constraint.

Amanulla Khan points out that although India has a long way to go in providing life insurance, its achievements in life insurance, largely because of the performance of the LIC, are something to be proud of. 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.

Political bargaining

The numbers in the Lok Sabha are such that the insurance Bill will breeze through it. But it is a very different situation in the Rajya Sabha, where the BJP will have to get the support of at least some opposition parties, if not the Congress, to ensure its passage. The BJP has some explaining to do: after all, just two years ago, its chairman of the Parliamentary Standing Committee on Finance, Yashwant Sinha, had opposed the move, saying that it would adversely affect social security concerns. It is possible that parleys between the two main political rivals on the issue, over which they have exhibited a tendency to agree on, will result in some ornamental modifications so that passage through the Rajya Sabha can be ensured. For instance, these could focus on the sections that would allow further increases in FDI limits to proceed through executive orders instead of returning to Parliament for a fresh authorisation. The AIIEA leadership has written to 35 national and regional parties, seeking their support. But the rank and file know that a bigger battle awaits them in the wider arena of public opinion. The union, which for two decades had stood as a citadel against the reform agenda in the financial sector, appears to be ready to play its role.