The Narendra 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 parliament on these ordinances. The NDA government heaved a sigh of relief when it was successful in getting the insurance bill passed in both the houses of parliament. The bill sought to raise the cap of foreign investment from 26 per cent to 49 per cent and passed it with the support of the Congress party.
The argument of the government is that the 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. The investment now coming would not only reach the people who are untouched by insurance, it would also help improve the insurance facilities in the country. Another argument is that by expanding the role of foreign companies in this sector, new kinds of insurance products (policies) would enter the market and newer technology would get a boost.
The Centre does not agree with the opponents of FDI in insurance that private companies with enhanced foreign investment can exploit customers. The government says it is not possible because there is a strong regulatory mechanism in place. The government's argument is that the Insurance Regulatory and Development Authority (IRDA) keeps vigil on the functioning of insurance companies.
It is notable that during NDA-I regime, when Yashwant Sinha was the finance minister, FDI was allowed in the insurance sector. However, during the UPA regime, when bill was introduced in parliament to raise FDI cap to a higher limit, the standing committee of the parliament, under the chairmanship of the same Yashwant Sinha, opposed it stating that there is no need to raise FDI cap. He argued that to expand their business, insurance companies can raise domestic resource. But, the government did not accept the recommendations of the committee.
Facts on the pros and cons of the foreign investment in insurance do not confirm the government’s argument that the 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 – the Life Insurance Corporation of India (LIC) – and there are 23 companies in the in the private sector providing life insurance.
Of this, 22 companies have stakes of foreign companies. Customers of private companies face a very high rate of claim rejections. We see that in 2012-13, private companies rejected 7.85 per cent claims whereas in the case of LIC, rejection rate was only 1.2 per cent.
For this reason and with the 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 as against 368 lakh policies issued by the LIC alone.
Lapse and forfeiture ratio
The annual report of IRDA says that although business of private insurance companies registered a decline of 7 per cent, 35.3 lakh life insurance policies, issued by them in the past, either lapsed or were forfeited in a single year. Total insured sum of these lapsed and forfeited policies was Rs 82,061 crore. In the case of the major private life insurance company, Birla Sunlife, this ‘lapse and forfeiture’ ratio was 61.3 per cent, against only 5.6 per cent in case of LIC!
The general insurance sector: Ever since the private players with foreign investment were allowed in the insurance sector, burden of premium has been rising. For instance, the mediclaim policy, which used to cost nearly Rs 4,000 annually for a family of four, now costs nearly Rs 11,000 annually. Insurance companies argue that this hike has been necessitated due to an increase in medical claims. Similarly, the third party insurance which is mandatory for all vehicle owners, now costs up to Rs 16,000 as against Rs 1600 before privatisation. Premium rates of almost all types of insurances have been rising after private players entered the insurance business.
Are private insurance companies only for the cities and the rich? The argument of the FDI apologists is demolished with the fact that LIC has 44 per cent branches in rural and semi-urban areas, whereas private companies have only 28 per cent branches in these areas. The government’s argument that the hike in the FDI cap in the sector would benefit the poor is also not correct. The private companies generally cater to the rich and the super rich. This is evident from the fact that the average first year premium of life insurance companies issued by private companies was Rs 41,525 whereas it was Rs 20,830 in case of the LIC.
About the government's contention that growth of sector is constrained by lack of resources, it does not hold water as there is no dearth of resources with the LIC or general public sector insurance companies. Recently, the LIC handed over a cheque for Rs 1,635 crore to the finance minister.
As against this, the foreign companies being invited to raise their stakes are themselves on the verge of bankruptcy. For instance the AIG, a US insurance company which is world’s largest insurance firm, virtually collapsed in 2008. Without a bailout package of $182 million, the AIG would have ceased to exist.
