DEBATE @ THE HINDU
The article by V.K. Shunglu in The Hindu, “The risk business needs better cover” (Op-Ed, February 14, 2013) is one-sided and conspicuously understates certain key aspects of insurance reforms undertaken in the country a decade ago. It misses the basic premise on which an insurance business is run — that of “trust” and the long-term “promises to be upheld.”
This industry should not be seen merely in economic terms. The settlement of the death claim of Hemant Karkare, chief of the Mumbai Anti-Terrorist Squad, who was killed in Mumbai’s 26/11, presents a clear-cut example of Trust.
Mumbai’s Dadar branch of the Life Insurance Corporation (LIC) had settled the death claim amount of Rs.25 lakh within five days whereas a private company (name withheld), where Karkare had coverage for a similar amount, had rejected the claim — and, after a lapse of six months — by stating that the deceased had wilfully risked his life, even after knowing that his life was in danger. That’s why I said the insurance business should not be seen in purely economic terms.
The tag of public sector should not be the reason for spewing venom. There are certain “Crown jewels such as LIC”; it settles 98.6 per cent of claims, the only insurance company in the world to do so. It is true, as Mr. Shunglu says, that the insurance business has become a key player in underpinning the long-term foundations of India’s capital markets and financial system. But for satiating the needs of India’s capital markets, these private insurance companies have done little good for gullible policyholders and their hard-earned monies.
This is an industry in which even with a small amount of investment i.e. Rs.100 crore, thousands and lakhs of crores of public money can be garnered. It is firmly believed that the Foreign direct investment (FDI) hike will allow foreign capital with small investments to gain greater access and control over large domestic savings. The annual report (2011-2012) of the Insurance Regulatory and Development Authority (IRDA) points out that FDI brought in by private life insurance companies up to March 31, 2012, was a meagre Rs.6,324.27 crore, which was to meet share capital requirements prescribed by the regulator. Not a single pie was invested in the infrastructure sector. It is LIC which is a saviour, and the government of the day is utilising it as a captive investor, just as it has done in the case of petroleum major ONGC.
In our country, insurance companies are mopping up people’s savings. During 2011-12, domestic savings were 32 per cent of GDP. Financial experts say that domestic savings, and not FDI, are crucial for any country’s economic development. In India, LIC has provided Rs.7,04,151 crore to the 11th Five-Year Plan (2007-2012) while the four general insurance companies and GIC of India have contributed about Rs. one lakh crore. Where will the government get these huge investments from if it tries to weaken the public sector insurance companies?
The World Economic Forum Financial Development Report 2012 tells the success story of LIC. It shows that given the low level of income and low disposable income of most Indians, insurance penetration in India is much greater than in countries with a per capita income that is 10 times higher. It is remarkable that with a per capita GDP of $1,388.80, India has achieved a life insurance penetration of 3.61 per cent as against 3.56 per cent of the United States with a per capita GDP of $4,8386.77. It is also a matter of pride that the report places India at the top of global rankings in terms of Life Insurance Density (measured as a ratio of direct premium to per capita GDP of 2011).
The LIC, the four general insurance companies in the public sector and GIC of India are doing an excellent job despite competition from private insurance companies. In 2011-12, LIC earned a premium of Rs.81,514.49 crore registering a market share of 71.36 per cent in premium income. It sold 3.57 crore new policies, to take an 80.9 per cent market share in the number of policies. Similarly, the four insurance companies have earned a premium income of Rs.30,532 crore and registered 58 per cent of market share.
The financial crisis in the U.S. and Europe has seriously eroded confidence in the banking and insurance sectors. At the same time, our domestic private insurance partners hardly need capital to be infused by their foreign counterparts, as put forth by the votaries of FDI increase.
Partners of private insurance companies in India like the Tatas and Reliance are on an acquisition spree, spending billions of dollars, both on the domestic and foreign fronts during the last five years. The others, like the State Bank of India and other public sector banks have capital reserves of their own. Some foreign partners have exited not due to a delay in the increase of FDI cap but because they are in search of greener pastures.
The author has also put forth another interesting argument — that shareholders and company boards be left free to determine whether additional investment should be through FDI or FII or by other means.
The world saw the bubble burst in 2008 due to such flawed and mistaken judgements by company boards and shareholders, when they invested the earnings/savings of innocent policyholders into Collateralised debt obligations, or CDOs. India was saved from such a situation because of the domination of the public sector in the banking and insurance sectors. Even the Prime Minister and the Finance Minister have shared this view.
Looking back, it is time to learn lessons from the global collapses of banks, insurance companies and other financial institutions like Lehman Brothers, etc. Foreign investment per se, does not bring any good with it, especially in fragile sectors like insurance. This sector is the pillar of any upcoming and growing economy.
(M.S.R.A. Srihari is a former joint secretary, Insurance Corporation Employees Union, Warangal division. E-mail: msra.srihari@licindia.com)
Keywords: FDI in retail, Foreign direct investment, private insurance companies, Foreign Institutional Investors, IRDA, LIC
FDI in the insurance sector will provide many benefits to the consumers and the economy. Major players such as Met Life, New York and Prudential have assets exceeding not billions but trillions of dollars. They have been in the business for a hundred or more years., operating in over eighty countries around the globe. Their credit ratings are AAA or better. They are not likely to risk all that reputation over small amounts. LIC would like to remain a monopoly and will always oppose competition. The Indian public deserves a real choice in their insurance needs. For example, LIC employees tend to strike work often, in complete disregard to the hardship caused to the customers. With robust competition LIC would be more mindful of their customers. India is a mature, powerful economy exporting hundreds of billions of dollars of goods and services (e.g. software), as well as FDI into the USA. We must grow up and overcome phobia of inbound trade. Two way trade is key to prosperity.
Courageous and right journalism would be to out the company rather than
with holding it's name.
Dear sir,
I know which insurance company is not making payment to the deceased and as a foreign company they are the most corrupt and i was telling my relative whenever i visit India.
The fine account put in by Srihari takes exception to the much hyped
clamour over FDI in insurance sector. As a better judge of reading the
pulse of our economy,which hinges mostly on our domestic savings
nurtured by PSUs like LIC, the author's arguments carry currency. LIC
stands unique as its adequacy in solvency margin, which the private
peers are uncertain about, hardly warrants any FDI. The fallout of FDI
in insurance over the savings of LIC's client base of 35 crores is
beyond one's conjuncture. The concurrence of our Parliamentary standing
committee with the views against FDI in insurance submitted by the All
India Insurance Employees' Association, the major trade union in LIC is
relevant in the present debate.
Thanks Srihari for the analysis. In India,it is customary to invest in gold the savings of the family. Eventhough this trend continues,it is LIC which broke this trend to some extent and made available public funds, for capital investment. This faith is the root cause for the healthy growth of insurance. In my view,players
from abroad,may not do much harm,as insurance laws in our country are stict and there is an over-seeing authority IRDA.
Completely agree with this author.
The other article (by V S Shunglu)only seems to be giving lop sided
arguments in favor of FII and FDI!
Worrying but eye opening article. It is a time bomb for the Indian customers. These
insurance companies are moping up all the hard earned savings and will bring a lot
of misery to India.
Please publish the name of insurance company which denied the payment as you also published LIC's name.
Totally incorrect inputs from the author, as the private insurance
company in question has also settled the claim within the same number of
days as LIC. The private company in question has not only proved this
with artefacts, but has made it clear that it is going to file
defamatory case against the parties for spreading incorrect details. So
the premise with which the author has started being incorrect, the other
details provided him also falls flat.
Good work from Mr Srihari. Pitfalls in Foreign pariticipation in the Insurance Industry is well described in the article. The insurance company that refused the Insurance claim of Karkare family should be named and shamed.
The company would have charged more premium due to the high risk profession Mr Karkare was in. The company accepted his application weighing the risks. It should pay up with interest and liquidated damges for each day of delay and compensation for the distress caused to the family.
Mr Srihari, I may not understand the business of insurance but you have made it clear that in the wrong hands it causes enormous harm to the policy holders.
Thanks for highlighting the Karkare case.
Thank you sir for keeping me sane in the morning. As you rightly pointed out supra-profits is being the motivation of private sector players who do their best for their venal and greedy sharesholders to maximize profits at the behest of poor people. If you were to only insure the healthy and safe , if you were to insure those individuals who are superbly sure of their well being - both physical and finiancial- Why are you in business?
Though I haven't the article in retaliation to which this article has been published but
I share the similar view as the author's. Not all things need to be shared with foreign
institutions. Every thing works well in certain context and environment. Indian
economic environment is totally different than any other country. Bringing in foreign
investment may not possibly lead to blooming insurance sector. Ultimately, the
purpose of the government is to serve citizens. If certain policies are denying
benefits to the policy holders then what is the objective to keep such insurance
company running.
The biggest problem with foreign insurance company is the formation of
their caucus with doctors and pharmaceutical companies which ultimately
creates strong influence lobby to influence govt.dececisions
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