Ten Years Of Liberalisation Of Insurance Sector

TEN YEARS OF LIBERALISATION OF INSURANCE SECTOR
Com. Amanulla Khan

The reforms in the insurance sector have completed one decade. The Insurance Regulatory and Development Authority Act 1999 ended the government monopoly over the insurance sector. It permitted private sector and allowed foreign capital to do business in insurance through joint ventures. Since then, 21 private players along with State owned LIC are doing life insurance business. Of these, 19 companies are operating in collaboration with foreign partners. In the general insurance industry, 15 private players, of whom 14 are in collaboration with foreign partners are competing with the four State owned insurance companies. Apart from them, some specialized State owned firms are also functioning in the industry. As per the annual report of IRDA for the year 2008-09, the Indian partners have employed a capital of Rs.13893.54 crore and their foreign partners Rs.4354.50 crore in the life insurance business. Similarly, the figures for general insurance is Rs.1911.51 crore and Rs.621.72 crore respectively. The FDI therefore amounts to 23.94% in the insurance sector.

BACKGROUND
The decision to open up the insurance sector witnessed great public debate. The opening up of this crucial sector lacked general consensus. More than 1.54 crore people petitioned the Parliament against opening up of the sector on the basis of the unhappy experiences of the pre-nationalisation days. Brushing aside objections both within and outside the parliament, the government went ahead to liberalise the insurance sector. The government came out with the following arguments in justification of liberalization:

01. Insurance penetration and density in the country is low;
02. The country needs massive investments in infrastructure and liberalizing insurance and pensions will help mobilization of long term funds;
03. Allowing foreign companies would help them bring a substantial portion of their worldwide premium funds into Indian infrastructure; and
04. India is a large economy and a big market with ample space for both private and public sector;

Those opposed to opening up argued that public sector insurance industry has make significant progress in achieving the tasks and objectives of nationalization. The public sector has given total security to the policyholders and made substantial investments in infrastructure and social sector. Insurance penetration and density depends on the levels of income and the ability to save after meeting the basic requirements of life. Comparison with different countries on the levels of penetration and density ignoring the levels of income is unjustified. Despite the low levels of incomes, surprisingly both the coverage and penetration of life insurance in India has been very good. India ranked 83rd among the 86 countries surveyed in terms of the per capita income in 1997 (Sigma Report 4/ 1998), while it ranked 33rd in terms of life insurance penetration. The life insurance penetration in India at 1.39% of the GDP in 1997 was much higher than that obtaining in countries with incomes five times or even ten times greater. They further argued that it makes no sense to say that by allowing foreign capital to do business these companies would invest their global premium funds in India. The investment decisions are always based on profitability and security and surely they would not be made out of gratitude.

THE REAL REASONS
These arguments both in favour and against apart, two important developments influenced the opening up of the sector. First, in the struggle between the two contending economic systems, capitalism registered a significant gain with the disintegration of Soviet Union in 1980. The absence of a countervailing force helped the developed nations led by the United States demand opening up of third world economies. The United States threatened imposition of sanctions against India under Super 301 if the insurance markets are not opened. The second was the financialisation of capital. Beginning from 1970, the world witnessed huge concentration of wealth and internationalization of financial capital. The financial wealth gained autonomy from production. Financialisation enabled creation of huge artificial wealth totally unconnected from production of goods and services. This process was helped by governments that adopted policies of deregulations on the understanding that markets are self-regulating and all knowing. The huge concentration of finance capital and its internationalization demanded newer and greater spaces for its investments. Demands, therefore, were made on the developing countries to liberalise their economies and open them to the international finance capital. Neo-liberalism became the dominant ideology dictating economic and political policies across the world. The role of the State was curtailed and excessive faith was placed in the markets. Therefore, it is not right to look at neo-liberalism just as a radical economic liberalism. The events since then have clearly proved that it is an ideology that is hostile to the poor, workers and the welfare State and promoted massive inequalities both within the nations and among the nations.

Beginning from 1991, the dominant classes in India fully embraced neo-liberalism. The Industrial Policy of 1956 which had envisioned building up of a self reliant economy through a dominant role of the public sector was given up. The dismantling of public sector began in order to vacate economic space in favour of the private sector. Therefore, it may not be right to say that there was any resistance to the demand for opening up the Indian economy and liberalizing the financial sector. The Indian government was too willing to do it. However, in order to gain legitimacy in public domain, Malhotra Committee was appointed to suggest reforms in insurance sector. Similarly, K.P.Narasimham Committee was asked to suggest reforms in the banking sector. The reports of both these committees were tailor made. These committees recommended placing Indian financial sector into the global financial architecture. Despite public opposition to these recommendations, the government went ahead to liberalise the financial sector. Therefore, the real reasons for opening up the Indian financial sector were the embracing of neo-liberal ideology and accommodation of the interests of the international finance capital.

TEN YEARS OF LIBERALISATION
The Indian insurance industry has registered impressive growth in the past one decade. The life insurance grew at a very fast pace with new business premium increasing from Rs 19857.28 crore in 2001-02 to Rs.87006 crore in 2008-09. The growth continues for the current financial year with new premiums touching Rs.75347.29 crore as at 31st January 2010. Similarly the total premium income increased from Rs.50094.46 crore in 2001-02 to Rs.221791 crore in 2008-09. The total assets under management rose to Rs.931000 crore as at the end of 31st March 2009. The public sector LIC has surprised the critics with a very strong showing. It has retained domination over the market. It is holding on to a market share of 70 percent in number of policies and 65 percent in new business premium. The LIC has also an impressive share of 88 percent in the total assets under management. The SBI Life with 6.43% market share in new premiums ranks second displacing ICICI Prudential which ranks third with 5.84% market share. Similarly the gross domestic premium income in the non-life sector increased from Rs.2439.41 crore in 2001-02 to Rs.30601 crore in 2008-09. In the current financial year premium underwritten upto January end is Rs.28169.23 crore. In this sector too, the major market share is retained by the public sector.

The premiums mobilized through life insurance as a percent of the GDP has touched 4.1 percent in 2008-09. This is significantly higher than many developed countries including Germany and on par with that of United States. The life insurance penetration is almost equal to the world average. The non-life penetration has marginally increased to 0.65 percent. It is worth noting that Indian insurance industry has been growing much faster than the world average. The global financial meltdown has shaken the insurance industry in the developed world. Even the giant AIG had to be bailed out by the government. The growth of insurance industry in the developed countries has become negative. The crisis left the Indian insurance industry unaffected and the growth story continues.

The advocates of liberalization have been campaigning that the growth experienced by the industry is due to competition. Therefore, there is a strident demand for further liberalizing the sector and hiking the foreign equity limits. Is this the truth? The answer is a vehement no. It cannot be the whole truth. The growth of insurance industry depends upon the growth of the general economy, levels of income and increasing levels of disposable income. Ignoring these crucial facts and giving credit only to competition is absolutely unfair. It may help understand that the LIC sold 794585 crore policies in the first year of its operation (1957). This was nearly 40 percent more than the number of policies sold by 245 private life insurers in the year prior to nationalization. The LIC, a monopoly performed much better in the very first year compared to what could be achieved through competition by 245 players. It must also be noted that Indian savings in the form of life insurance showed steady increase over the years as a share of GDP. In 1985-86 the life insurance penetration in India was 0.7 percent and this doubled to 1.4 percent in 1997-78.

This clearly indicates the existence of a very strong link between the growth of economy, levels of disposal income and the growth of the life insurance business. The Indian economy averaged a growth of over 8 percent during this period. The GDP grew from Rs.19,52,036 crore in 1999-2000 to Rs.53,21,753 crore in 2008-09 (Source: RBI). Similarly, the gross domestic savings grew from Rs.4,84,256 crore in 1999-2000 to Rs.17,79,614 in 2007-08. The household savings constitute around 65 percent of the gross domestic savings. Currently, the life insurance premium account for around 19.5 percent of the financial savings. The growth, therefore, was mainly driven by the growing economy and increasing levels of incomes.

However, some disturbing trends are seen in this growth. Life insurance premiums are a major source of funds for infrastructure. The popularization of unit linked products have raised a serious question over the ability of the life insurance industry to provide long term funds for infrastructure since investment decisions are taken by the policyholders in these policies. Thus one of the major arguments advanced for opening up of the sector has fallen flat. Today ULIPs account for over 70 percent of the insurance policies sold after liberalisation. The ULIPs account for nearly 90 percent of the portfolio of the private sector. The government has estimated that over $500 billion are required for the development of infrastructure in the next few days. The IRDA has shown some concern over this distortion and has advised the companies to have a proper mix of the policies so that long term funds are generated for infrastructure investments.

There is also a worry over the high level of lapsation. One of the major reasons for such high level of lapsation could be mis-selling. According to IRDA, LIC has the lowest lapsation ratio of 4 percent. The lapsation ratio in the private sector ranges from 19 percent for Max-Newyork to 53% for ICICI Prudential. There is concern over the high operating expenses in the private sector too. The contract of insurance is a promise and the ultimate delivery of service of an insurance product is the honouring of that promise. The public sector scores over the private sector in this aspect. The claim settlement ratio of LIC is 99.86 percent as against the average of 70 percent for the private sector. The IRDA has expressed concern over the delay in settlement of claims as also the high level of repudiation. But just expressing concern is not enough. The regulator must take concrete measures to rectify this situation.

PROSPECTS FOR GROWTH
The insurance industry is expected to continue its growth story. A 2007 Report by Mckinsey & Company notes that “among all financial products in India, life insurance enjoys the highest popularity and demand. Contrary to the conventional directly correlated risk-return relationship, Indian consumers perceive life insurance as a low-risk and high-return investment – a perception driven by high awareness of the Life Insurance Corporation of India (LIC) and its record of delivering stable returns over the years”. The life insurance thus is a preferred product for savings as also to avail the tax benefits. Today the life insurance industry has been servicing 30 crore individual policies. Different estimates are made of the size of the market. Projections are being made that in the next three to four years, the total premium income would double with a few differing voices that claim these estimates as very optimistic considering the poverty levels in India. But there is unanimity that India is one of the fastest growing markets for insurance. The major source for insurance business has been the Indian middle class. The middle class is growing and estimated to be nearly 200 million now. The economic growth has benefitted them and these sections have increasing levels of disposable incomes. The demography is also in favour of the insurance industry. The estimates suggest that 60 percent of the Indian population is below the age of 25 years and are potential future customers. Though the wealth is very unevenly distributed, the fact is that the asset owning classes are increasing in India. This is an opportunity for the non-life insurance industry to aggressively design and sell personal and retail insurances. The non-life insurance industry, even after liberalization has mainly been targeting the corporate business.

The size of Indian population makes it a hugely attractive market. There is no doubt that the benefits of growth of Indian economy have not benefitted all sections of the population and a large number still live a very miserable life. The Tendulkar Commission has put the figure of those below poverty level at nearly 40 percent of the population. A large number of these people live in rural India. There is a serious talk of inclusive growth now. If the government seriously takes measures to improve the life and purchasing capacity of these people, then rural India would provide a huge opportunity for growth of the insurance business. The experience of micro-insurance has proved successful and this opens up vast opportunities for the expansion of insurance activities.

India is a country where there is no social security. Nearly 90 percent of the work force in the country is employed in the un-organised sector. This section needs insurance as a security against various risks. With intense competition, it is natural that the companies would target the most profitable business ignoring this vast section which is not capable of purchasing big ticket insurance policies. Driven by the intense competition, even the public sector seems to be faltering in reaching the most deprived and needy sections of the population. Therefore, there is need for the government and regulator to force the insurance companies to come out with plans that meet the requirements of these companies.

Health insurance provides another big opportunity. It is justified to expect that the basic responsibility of providing health services to citizens lies with the government. It is much more justified considering the fact that poverty is widely prevalent and the country has 40 percent of its people below the poverty level. However, what is surprising that India has one of the most privatized health services in the world and the government spending on health is very low. Surely, the companies are going to cash on the opportunities in health insurance. But a vast majority of people cannot afford the health insurance cost making the government intervention absolutely necessary in this area.

THE NEW CHALLENGES
The liberalization has helped create a number of new channels of distribution of insurance products. The bancassurance has been very successful with private sector securing 21 percent of the new premiums through this channel. The private sector has also utilized well other alternate channels. The Corporate Agents, Brokers and Direct Sale has contributed 24 percent of the new premium for the private sector during 2008-09. However, LIC continues its dependence on tied agents who have contributed 97.34% of its new business premium during 2008-09.

The successful experience with the bancassurance is coming under strain with major banks deciding to enter the insurance business promoting their own companies. The SEBI has also noticed cases of mis-selling of insurance products by the banks. The IRDA is contemplating to permit the banks to have multiple agencies. What impact this can have has to be seriously analyzed.

The recommendation of Swaroop Committee for abolition of agency commission and replacing it with a fee based structure had created disquiet in the industry. This recommendation ignores the fact that insurance in India is still sold and not purchased. If the government accepts this recommendation, it will seriously harm the prospects of the insurance industry in India. The insurance agents have been protesting against this recommendation and even the regulator has opposed this move.

In sum the key drivers of growth would be the distribution channels. Therefore, there is an urgent need to professionalize the agency force and strengthen the alternate distribution channels.

CONCLUSION
The growth of the insurance industry in the past one decade is being seen, rather mistakenly, as unqualified success of liberalization. Therefore, efforts have been taken to further liberalise this sector. The Insurance Laws (Amendment) Bill 2008 and LIC Act (Amendment) Bill 2009 have been tabled in the parliament. Currently these two bills are being scrutinized by the Standing Committee on Finance. These bills seek to hike the foreign equity participation and also take steps towards privatization of the public sector companies.

The joint ventures with foreign capital were allowed on the premise that substantial portion of the global premium funds of the foreign partners would be invested in Indian infrastructure. There is no evidence to suggest such investments having taken place. This proves right the understanding that nobody would take investment decisions on the basis of gratitude. Having settled this question, one must say that 26% FDI limit has not been an entry barrier. This reasonable restriction has not deterred the foreign companies to enter India, which they see as a hugely attractive market, as the experience has shown. The argument that FDI has to be increased as the Indian partners are unable to bring the required capital also cannot be true. “Capital has so far not been a major constraint for the insurance industry given the way they have been expanding their business (IRDA Chairman – Business Standard 5/1/2010). It is also a fact that many private companies have decided to approach the capital markets with initial public offerings. This would help them raise additional resource.

Then, why is this excessive obsession with the foreign capital. Today the world is seriously debating the so-called beneficial effects of FDI on the recipient economy. The World Bank appointed Growth Commission has concluded that “foreign saving is an imperfect substitute for domestic saving, including public saving to finance the investment a booming economy requires”. The experience of the successful economies across the world suggest that public investment is the foundation on which infrastructure is developed. The experience with the private investments has not been encouraging. Insurance, especially life insurance mobilizes long term funds and therefore, it is important that the government must exercise greater control over these funds. The hike in foreign equity would only succeed in giving greater access and control to foreign capital over the domestic savings. This is simply against the national interests.

The global financial meltdown has left India largely unaffected. There is universal acknowledgement that this is due to the strong presence of public sector in the Indian banking and insurance industries. The world realized at great peril that finance capital is fundamentally in search of quick profits and hence speculative in character rather than having any enduring links with the industry. Therefore, efforts are being made to tame the finance capital and as a result many of the financial institutions including insurance companies have been taken over by the governments in the developed countries.

Therefore, India must remain cautious. The plans to further liberalise the insurance industry must be given up. Today, there is a conflict between the IRDA and SEBI over ULIPs and between RBI and SEBI over interest futures. The government must take steps to settle these conflicts and strengthen the regulatory mechanism for the orderly growth of the financial sector, insurance included. However, some measures being taken by the government are raising apprehensions. There is a talk of allowing insurance companies to trade in derivatives. The Union Budget for 2010-11 has proposed to allow new private banks. This raises a genuine question – are we going to find ourselves in a situation that was existing immediately after independence? This was the period when every business house had owned a bank and an insurance company. The result was disastrous. India and its people cannot afford to allow such a disaster to happen again.

(Com. Amanulla Khan is President, All India Insurance Employees' Association)