FDI in Insurance Not for common man

Dr Ashwani Mahajan
Modi Government, which has been facing ire of opposition parties and also of its friends, after promulgation of several ordinances, has been under stress to get the stamp of the parliament on these ordinances. The Government had a sigh of relief when it was successful in getting the insurance bill passed in both the houses of parliament, which seeks to raise the cap of foreign investment from 26 per cent to 49 percent, with support of the congress party. Argument of the Government in favour of the bill is that insurance sector is ‘starved of’ investment and therefore is finding it difficult to grow for want of resources. With the help of foreign investment, this sector will grow, and would not only make its reach to the people, who are untouched by insurance; it would also help improving the insurance facilities in the country. Another argument of the Government is that by expanding role of foreign companies in this sector, new kinds of insurance products (policies) would enter the market and new technology would also get a boost. Government does not agree with the opponents of FDI in insurance, that private companies with enhanced foreign investment can exploit customers, as the same is not possible, given a strong regulatory mechanism in place. Government’s argument is that Insurance Regulatory and Development Authority (IRDA) keeps vigil on the functioning of insurance companies.
History of Insurance Bill
It is notable that during NDA-I regime, when Yashwant Sinha was the Finacne Minister, FDI was allowed in insurance sector. However, during UPA regime when bill was introduced in the parliament to raise FDI cap to a higher limit, standing committee of the parliament, under the chairmanship of Yashwant Sinha only, opposed the same, stating that there is no need to raise FDI cap and to expand their business, insurance companies can raise domestic resource. But, the then UPA Government did not accept the recommendations of the Standing Committee.
Facts on the pros and cons of the foreign investment in insurance do not confirm with Government’s argument that its step (Insurance Bill) is in the best interest of the common man.
Claim Settlement Ratio
There are two types of life insurance companies functioning in the country. In the public sector there is one entity namely, the Life Insurance Corporation of India (LIC) and in the private sector there are 23 private life insurance companies; out of which 22 companies have stakes of foreign companies and only one private company does not have foreign stake. Customers of private companies face a very high rate of claim rejections. We see that in 2012-13, private companies rejected 7.85 percent claims, whereas in case of LIC, rejection rate was only 1.2 percent.
For this reasons and faith of people in LIC, private life insurance companies could not capture much insurance business in the country. It is notable that all 23 private insurance companies together, could garner a business of only 74 lakh life insurance policies, against 368 lakh policies issued by LIC alone.
Lapse and Forfeiture Ratio
Annual Report of IRDA says, although business of private insurance companies registered a decline of 7 percent, 35.3 lakh life insurance policies, issued by them in the past, were either lapsed or forfeited in a single year. Total insured sum of these lapse and forfeited policies was 82,061 crores. In case of a giant, life insurance company, Birla Sunlife, this ‘lapse and forfeiture’ ratio was 61.3 percent, against only 5.6 percent in case of LIC
Rising Burden of Health of General Insurance
Ever since, private players with foreign investment were allowed in the insurance sector, burden of premium has been rising. For instance mediclaim policy, which used to cost nearly rupees 4000 annually for a family of four, now costs nearly rupees 11000 annually. Insurance companies argue that this hike has been necessitated due to increase in medical claims. Similarly, Third party insurance which is mandatory for all vehicle owners, now costs up to rupees 1600, which used to cost only rupees 160 before privatisation. Premium rates of almost all types of insurances have been rising after private players entered into insurance business.
Private Insurance Companies are for Cities and Rich
The argument of FDI apologists is demolished with the fact that LIC has 44 percent branches in rural and semi-urban areas, whereas private companies have only 28 percent branches in these areas. Government’s, argument that hike in FDI cap in insurance sector would benefit poor is also not correct. Private companies generally cater to rich and super rich. This is evident from the fact that average first year premium of life insurance companies issued by private companies was rupees 41,525 whereas it was 20,830 in case of LIC.
About Government’s contention that growth of insurance sector is constrained by lack of resources, does not hold water as there is no dearth of resources with LIC and general public sector insurance companies. Recently LIC handed over a cheque of rupees 1635 crores to the Finance Minister. Rather, foreign companies being invited to raise their stakes are themselves at the verge of bankruptcy. For instance AIG, a US insurance company; which is world’s largest insurance company virtually collapsed in 2008; and without a bailout package of $182, AIG would have ceased to exist.
(The author is Associate Professor, PGDAV College, University of Delhi)


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