People's Democracy

         AIIEA Opposes Hike In FDI In Insurance

 K Venu Gopal

THE finance minister, P Chidambaram, came out with proposals to hike FDI in insurance sector and to levy 10 per cent tax on the risk portion of life insurance premium, during his budget speech on July 8, 2004. All India Insurance Employees’ Association (AIIEA) totally opposes these moves and has already staged protest demonstrations throughout the country on July 9, 2004. AIIEA would be organising the employees into a massive strike action in case the government proposes to bring in a Bill to amend the IRDA Act for increasing the FDI in insurance sector.

HIKE IN FDI IN INSURANCE COMPANIES

The IRDA Act restricts foreign equity in insurance companies to 26 per cent.  The private companies for long have been demanding removal of restriction on FDI.  The earlier NDA government had appointed NK Singh Committee to go into this question. The committee has recommended enhancing the foreign equity limit to 49 per cent. The earlier government had accepted this recommendation and the Election Manifesto of BJP specifically assured its implementation if voted to power. Even with the change in government, the private companies are maintaining pressure to enhance the FDI limit. The CII and other interested sections pleaded strongly in favour of increasing the foreign equity limit when P Chidambaram visited the Mumbai Stock Exchange in May 2004.

Now, in the Budget proposals, Chidambaram has come out with a proposal to hike foreign direct investment in insurance sector (along with telecommunications and civil aviation). He proposed increase in the FDI in insurance from 26 per cent to 49 per cent. Indications are available that a Bill will be moved to amend the IRDA Act in this budget session itself.

The hike in foreign equity will increase the ability of the private companies to manipulate and exploit the insurance market. Once the foreign partner’s equity goes up to 49 per cent and the Indian-partner puts up his share for public offer, the foreign partner would be the majority share holder and would effectively control the company. Thus, the foreign capital will gain greater access and control over the domestic savings. This has happened in other industries including in banks.

TARGETING URBAN ELITE

During, the year 2003-04 the market share of 12 private companies together was 8 per cent in terms of number of policies while the market share of private companies in terms of new premium income was 13 per cent. This is because the private companies have been targeting the urban elite and are cornering premiums of higher denominations.  Though this in itself may not be objected to, their complete absence from rural and other socially purposive insurance cover and investments creates an uneven climate of competition against the public sector. They will become much more aggressive in this respect with the availability of increased foreign capital. 

This will seriously affect the public sector which now cross subsidises its rural and other socially oriented business. The increased access to domestic savings will result in reverse flow of resources through profit appropriations and various other methods. The increase in the foreign equity will also enable the bigger players to play the game of takeovers and mergers. This is what is happening in the US and Europe.

In general insurance for example, motor third party insurance which is a chronically loss making portfolio is practically being handled by the public sector companies. The private companies keep a safe distance away. Similar is the situation with regard to medical insurance in which they cater mostly to richer clientele. Increase in foreign equity would help private companies to garner more profit areas of general insurance sector like marine and fire, that are in some way or the other tied business. In fact, the IRDA Annual report 2002-03 notes on page 103 that fire and engineering portfolios accounted for 32.63 per cent and 7 per cent respectively for the premium underwritten by the private players while in respect of the public sector companies these profit making portfolios accounted for 19.43 per cent and 4.5 per cent respectively. On the other hand, motor and health contributed around 41 per cent and 7.5 per cent of the business underwritten by the public sector as against 27 per cent and 5.5 per cent respectively for the private insurers. Hence, increase in foreign equity would strengthen the private companies without the burden of social responsibility.

EFFECTIVE MONITORING OF PRIVATE INSURANCE COS.

Presently, the IRDA is not in a position to effectively audit or monitor the functioning of the private insurance companies.  With the increase of the foreign clout, the IRDA would further shy away from effectively monitoring their activities. IRDA Annual report 2001-02 mentions on page 6 about the notices issued to certain insurance companies, which have not met their social obligations.  But there seems to be no follow up, as the issue was not mentioned in the report 2002-03. On the other hand, the LIC and public sector general insurance companies who have to attend to large social responsibilities would be burdened with competing against such companies. The parliament too had no occasion to scrutinise the functioning of these private companies in order to assess whether they have fulfilled the objectives that were assumed in inducting them in the first place. It may also be mentioned that foreign insurers including the biggest of them like AIG and Prudential are involved in several charges of violation of regulations like wrongful accounting practices both in US and Europe.

ARE THE FM’S ARGUMENTS VALID?

The finance minister in his budget speech while making the proposals for hike in FDI said, “the CMP declares that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports.”  He went on to add, “Three sectors of the economy fully meet this description”.

Now let us examine whether these descriptions are valid for insurance.

No new technology is brought into the country: The issue of foreign equity is often linked with induction of new technology and products. The private insurance companies have nothing to offer in this respect. In the insurance sector, there is no technology needed to be brought in from other countries, leave alone high technology that the finance minister was expressing as the need.  The mortality rates and other principles of insurance are based on the Indian conditions, because the policyholders are from this country. The products of LIC are being renamed by the private insurance companies and are sold as their own products.  Hence, foreign expertise is also not involved in this sector.

So there is no justification even on this count. It was also argued that competition will expand market and the foreign insurers will bring better products. This has simply not happened. The size of the market has remained by and large the same and from this market the private companies are picking up the creamy sections in the metros seriously eroding the ability of public sector to cross subsidize its products in the rural areas.

Flow of funds for infrastructure is a myth: Life insurance is all about mobilising the savings for long term investment in social and infrastructure sectors. It was also argued that opening up of insurance market would enable huge flow of funds into infrastructure. The record of private companies on this is dismal. More than fifty per cent of the policies they sell are unit-linked insurance where the decision on investment of savings element in insurance is taken by the policyholders. In fact as per a press report, ninety five per cent of policies sold by Birla Sun Life and over 80 per cent of policies sold by ICICI Prudential were unit-linked policies during 2003-04. Under these schemes, nearly 50 percent of the funds are invested in equities thus limiting the fund availability for infrastructural investments. As against this, the LIC has invested Rs 40, 000 crore as at March 31, 2003 in power generation, road transport, water supply, housing and other social sector activities.

The Law Commission of India released a consultation paper on June 16, 2003 on the revision of the Insurance Act, 1938. The consultation paper proposes a suitable amendment to Section of 27C of Insurance Act allowing insurers especially carrying on general insurance business to invest funds outside India. So, once the law is amended to allow insurers to invest funds abroad, the exports that these private companies would generate, would be the export of savings of the people.

For these reasons, we are convinced that enhancing the foreign equity in insurance will weaken the public sector and in the longer term will be injurious to the economy itself.  We are, therefore, opposed to any increase in the foreign equity limit. (The writer is general secretary of AIIEA)