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
)
Read more at : http://www.thehindu.com/todays-paper/tp-opinion/yes-insurance-needs-better-cover-but-not-with-foreign-capital/article4453695.ece
