INSURANCE INDUSTRY IN INDIA
A DECADE AFTER LIBERALISATION – WAY AHEAD
Amanulla Khan, President, All India Insurance Employees’ Association.
The insurance industry in India was opened for private participation in 1999. The domestic players were permitted to enter the sector in partnership with foreign insurance companies. The foreign equity limit was placed at 26 percent. Since then all major business houses entered the insurance business in collaboration with multinational companies. A number of public sector banks have also entered the sector through joint ventures with foreign insurers. The IRDA Annual Report for 2010-2011 records that 23 private players apart from the State-owned LIC are operating in the life insurance market as at 30th September 2011. Similarly 18 private companies and 4 public sector companies are in the general insurance business. The two State-owned companies Export Credit Guarantee Corporation of India Ltd., and Agricultural Insurance Company of India Ltd., are functioning as specialized insurance companies. The GIC-Re is the sole reinsurer in the country. A few companies are also operating as stand alone health insurers. It is now more than 10 years since the sector was opened up. It is, therefore, necessary to review the developments of the past one decade to gain an insight into the future of the industry and the role this sector is expected to play in the national economy.
ROLE OF INSURANCE INDUSTRY IN NATIONAL DEVELOPMENT
The life insurance business was nationalized in India in 1956 and the Life Insurance Corporation was created by taking over 245 private run insurance companies. The major objectives of nationalization were to guarantee the safety of the policy monies and channelise the small savings of the people for nation building activities. The nationalization of life insurance business was a clear pointer to the development pattern India wanted to adopt. It was the understanding of the national liberation movement that independent India has to industrialise at a fast pace to lift millions of its people out of poverty. The nation decided to build a self reliant economy. The Avadi Congress Session held in 1955 declared to build a socialist pattern of society and adopted a planned development of the economy. In order to gain control over the savings of the people necessary to achieve this goal, the Imperial Bank was nationalized in 1955 and the State Bank of India was created. The life insurance business which mobilizes long term savings was a natural choice for nationalization. On nationalization of life insurance, Shri C.D.Deshmukh, the then Finance Minister said “nationalization of life insurance is a further step (after nationalization of Imperial Bank) in the direction of more effective mobilization of the people’s savings”. Thus the role of the newly created LIC was very clearly defined.
The LIC did not disappoint the nation. It spread the message of life insurance to every corner of the country. The total number of policies in 1957 was 56.86 lakhs. Today LIC has around 30crores individual assurance policies apart from a large number covered under its group schemes for socially disadvantaged. The per capita insurance in 1955 was just Rs.25/-. It gradually increased to $9.1 by 2001. It must be remembered that the nation making was never easy for India. This period witnessed tremendous difficulties for India as a nation and its economy. The country had to fight three wars and also had to fight a number of famines and droughts. These developments certainly had adversely impacted the rate of economic development. India recorded impressive growth in the past one decade. However, this did not lead to equitable development and the fruits of this growth by-passed the overwhelming majority of its population. Therefore, India is still considered as a low income nation. Despite the low incomes, the success achieved by LIC in spreading the message of insurance and mobilizing the small savings is outstanding. India ranked 83rd among the 86 countries in terms of per capital income in 1997, 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. On the success of LIC in the spread of insurance and mobilization of savings, a prominent international magazine commented that ‘in a country with low per capita income and many people so busy trying to keep alive that they have little time to worry about death, the performance of LIC is truly outstanding’. During these years, the LIC also made massive contribution to the national economy by providing cheap finances to the government for infrastructure and social development. It is amazing to note that LIC funds more than 25% of the government borrowings. No single institution anywhere in the world funds the government borrowings to this extent.
The general insurance industry was nationalized in 1972. The General Insurance Corporation was created as a holding company with four subsidiaries. The four subsidiaries were New India, United India, National and Oriental insurance companies. Since 1972, the public sector general insurance companies have not only given confidence to the businesses in the country by insuring the risks but have also made sincere efforts to secure the assets specially those that provide the livelihood for the poor in rural areas. The products like cattle insurance, hut insurance etc were given a big thrust in the rural areas. These general insurance companies too took the message of insurance to the hitherto neglected rural areas. They also helped the national economy in great measure.
The performance of LIC and the public sector general insurance industry did not make any case for giving the insurance space in India to the private sector. The contribution of the public sector insurance to the national economy was immense and this fact is acknowledged even by the protagonists of free market. Still the government in 1991 went ahead to open this sector despite massive public opposition. The government argued that though the public sector insurance industry in India has performed well, there is space for greater number of companies in the business considering the size of India’s population. It was also argued that the insurance premium as a percentage of GDP and insurance density is low and opening the sector to private and foreign players would be of help. These arguments cannot stand scrutiny as insurance penetration and insurance density cannot be seen in isolation from the general growth of the economy and the disposable incomes.
OPENING UP OF INSURANCE SECTOR
In 1991, India made a marked change in its development policy. 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 Indian capitalists who had earlier demanded the State to build infrastructure for industrial development had accumulated unprecedented wealth over the years. They now wanted the State to vacate the economic space it has occupied, so that this accumulated wealth could be deployed for further profits. The Indian State adopted a policy to dismantle the public sector to create economic space for the private capital. The opening up of the insurance sector also has to be understood in this context. There is a genuine feeling among a section of the people that the Indian government was forced to open up the economy due to the pressure of the developed nations. This is not entirely true. The Indian ruling classes too wanted the State to act only as a facilitator for economic activity instead of directly running businesses. The Indian government was too willing to switch over to the new role as demanded by the domestic capital. 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 draw a road map for reforms in the banking sector. Tendulkar Committee was appointed to study the feasibility of capital account convertibility. The reports of Malhotra and Narasimham Committees were tailor made. These committees recommended liberalization of both the insurance and banking sector with the aim to place the Indian financial sector into the global financial architecture. Despite massive public opposition, especially to the opening up of the insurance sector, the government went ahead to liberalize the financial sector.
Two important developments influenced the decision to liberalize India’s financial sector. First in the struggle between the two contending economic systems, capitalism registered a significant gain with the disintegration of Soviet Union in 1990. The absence of a countervailing force helped the developed nations led by the United States demand opening up of the third world economies. The United States threatened imposition of sanction against India in 1989 under its omnibus law Super 301 if the insurance markets were not opened. The Second was the financialisation of capital. Beginning from 1970 the world witnessed huge concentration of wealth and this resulted into the internationalization of finance 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 the 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 liberalize 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.
India did not remain unaffected by the developments taking place across the world. The Indian ruling class which was facing a very serious economic crisis too adopted neo-liberalism and decided to become a part of this global finance capital. Therefore, the opening up of the Indian insurance sector was not because of the inability of the public sector to perform well or the performance of the public sector banks. The financial sector had to be opened up to accommodate the interest of the international finance capital which is the driving force behind the neo-liberal ideology.
A DECADE OF REFORMS
The Malhotra Committee recommended the entry of both Indian and foreign capital into insurance sector. At the same time it also recommended the government to increase its equity holding in the LIC and public sector general insurance companies and disinvest 50 percent of the equity to make these companies competitive. The government despite massive opposition succeeded in allowing private companies by enacting the IRDA Act in 1999 but could not succeed in privatization of the public sector companies so far due to the opposition of the All India Insurance Employees’ Association which mobilized massive public support to its cause.
The Life insurance industry recorded impressive growth in the past one decade. The new business premium increased from Rs.19,857.28crores in 2001-02 to Rs.1,65,223.99crores in 2010-11. The total premium income also rose during this period from Rs.50,094.46crores to Rs.2,91,604.99crores. India today ranks 8th in the world in terms of the volumes of life premiums mobilized. The life insurance penetration has reached 4.4% in 2010 with an insurance density of $55.7 (IRDA Annual Report 2010-11). The life insurance penetration in India is significantly higher than many developed countries including the United States, Germany, Spain and Canada. The level of penetration is also higher compared to the world average. This is surprising for a nation with a low per capita income. The major contributor to this growth is the State owned LIC. The LIC has retained its dominance in the market with about 70 percent market share in first year premium income and over 75 percent share in the number of policies.
Similarly the gross domestic premium income in the general insurance sector increased from Rs.11,446.88 crores in 2001-02 to 42,576.45 crores in 2010-11. This sector witnessed steady growth and for the year 2010-11 it recorded a growth of 22.98% (IRDA Annual Report 2010-11). In terms of the premiums earned in the general insurance industry, India today ranks 18th in the world (Sigma Re 5/2011). The analysis of the Sigma Report suggests that India is bound to improve its standing in the years ahead. The non-life insurance penetration rose to 0.71% with a density of US dollar 8.7. In this sector too, the public sector is the dominant force.
The impressive performance of the insurance sector is being attributed to the opening up of the sector and the resultant competition. It is important to dispel this misgiving. The growth of the insurance sector cannot be in isolation from the behavior of the economy. There is a strong link between the growth of economy, levels of disposable incomes and the growth of the life insurance business. The Indian economy grew impressively in the last decade but this growth is slowing down in the recent period. It is acknowledged that this growth was not inclusive and the economy failed to meet the requirements of the large number of people. Still the growth helped certain segments of the population and enabled them to have increased disposable income. The gross domestic savings grew from Rs.4,84,256 crores in 1999-2000 to Rs.22,07,423 crores in 2009-10 (Source: RBI). The household savings amounted to Rs.15,36,071 crores in 2009-10. The life insurance premium accounts for nearly 20 percent of the financial savings in India. The growth of the Indian economy had a beneficial effect on the insurance sector. The increasing levels of disposal income helped the life insurance industry, mainly the LIC to record unprecedented growth. This link between the general economic growth and the performance of the insurance sector becomes much clearer when seen from the fact that the slowdown in the Indian economy in the last two years has also slowed down the growth of the insurance sector.
AREAS OF CONCERN
The insurance sector was opened up by the government arguing that the foreign partners of the private companies will bring a sizable portion of their global premium into India to help the nation meet the fund requirement for the infrastructure development. The total capital employed by both the private life and non-life insurers is Rs. 28,167.55 crores as on 31st March 2011 and out of this the FDI component is Rs.6,650.99 crores (IRDA Annual Report 2010-11). There is no evidence to show that apart from the equity capital, the foreign partners brought any part of their global premiums into India. It must be remembered that the government at the time of opening the sector had hoped that the insurance sector alone would bring in around 25 billion US dollars annually into Indian infrastructure. These expectations are belied. Life insurance premiums are a major source of funds for infrastructure. With the ULIPs dominating the portfolio of the private insurers, their ability to make substantial contributions to the infrastructure is limited. The Economic Survey 2010 has noted this fact and IRDA asked the private sector to correct this distortion. But nothing much has changed. The life insurance companies have infrastructure investments of Rs.89,180.75 crores as at 31st March 2011. Of this the contribution of LIC is Rs.80,491.49 crores and the private sector Rs.8,689.26 crores. This means that LIC has provided over 90% of the infrastructure funding.
The other important reason advanced was that the opening of the sector would benefit the customers through better servicing and products. On this too, the private sector has failed to come up to the expectations. The record of private life insurance companies in settlement of claims compares poorly with the LIC. In case of individual death claims LIC has settled 97.03% claims for the year 2010-11 compared to 86.04% by the private sector. The individual death claims repudiated by the private sector amounts to 8.9% as against 1% by LIC. Similarly LIC has settled 99.66% of the group death claims as against 93.33% by the private sector (Source: IRDA Annual Report 2010-11). Such high percentage of repudiation of death claims by the private sector is a serious cause of concern and the Regulator has to look at this issue seriously.
The high lapsation ratio is another area of concern. The LIC has the lowest lapsation ratio of 5% for the year 2010-2011. The lapsation ratio in the private sector is alarmingly high. The lapsation ratio for Birla Sun life was 72%, ICICI Prudential 46% and Tata AIG 33% for the year 2010-11 (IRDA Annual Report 2010-11). The high level of lapsation could be due to mis-selling and other factors. There is a serious apprehension that to meet the social and rural insurance targets, many companies are adopting questionable methods. The IRDA should seriously examine this issue. The private sector also has high levels of operating expenses. This issue also has to be examined by the Regulator in order to protect the interests of the policyholders.
OUTLOOK FOR INSURANCE SECTOR
The world insurance industry is yet to recover from the global financial crisis. The life insurance and the non-life insurance industry in the United States and Europe are stagnating. India along with China has experienced a significant growth despite the economic downturn. There is a consensus among the experts that Indian life insurance industry has vast potential. The recent performance of the non-life sector has also raised expectations of sustained growth.
The biggest advantage of India is its young population. It is estimated that nearly 60% of the Indian population is below the age of 25 years. This demographic advantage along with the rising middle class suggests a huge potential for the insurance industry. It is also expected that the growth in the economy would also result in rising incomes for at least a section of the population. This section provides a big opportunity and that needs to be encashed. The middle class is also keen on saving for the education, marriage and future needs of their children. Therefore, products that meet the needs of these sections have to be designed and a big push has to be given.
The improvement in medical facility and the general improvement in the living standards of a section of the population have pushed up the longevity. There are estimates that nearly 120 million Indians are now over 60 years. This segment of the population is bound to increase and the risk of living longer is a matter of great concern to them. This offers a huge market for the pensions. India has a work force of nearly 48 crores. But only a little over 1 crore who work mostly in government sector have any kind of pension. India lacks a social security to the overwhelming majority of the working population. Therefore, there is a huge market for the pension products. The government’s efforts to promote pension schemes through PFRDA have met with little success. This is for the reason that both the returns on investment as well as the accumulation at the time of maturity to buy an annuity are uncertain. The Standing Committee on Finance has suggested to the government to guarantee the capital and assure a minimum return. But the government seems to be unwilling to accept this suggestion. Unless there is an element of guarantee and assurance, the PFRDA schemes have little chances of success. The role of IRDA also on the issue of promotion of pension schemes is questionable. The IRDA has to adopt a pragmatic view and promote pension policies with some kind of an assurance. The pension market has huge potential and it needs to be properly developed.
The economic development in India has not been equitable. It is now recognized that growth by itself cannot create equity and there is a need for the affirmative action by the government on behalf of the poor. It is estimated that India has over 40 percent of its population below the poverty levels. The government has been speaking about inclusive growth. The government must support these sections and create conditions for the insurance industry to reach them through micro insurance and group insurances. The public sector LIC has insured a substantial number of under privileged persons through its group and low cost micro insurances. Unless the Regulator and the government give a big push towards this direction, the poor in this country will continue to remain deprived and neglected.
Health insurance is another big opportunity. India has one of the highest private expenditure on health. But it is estimated that not even 2 percent of this expenditure now is met through insurance funds. The public health system is in a big crisis. The public spending on health in India is one of the lowest in the world. This makes a large section of the population vulnerable. Though in the recent period the government has introduced certain health insurance schemes in collaboration with the insurance companies, much more has to be done. Both the government and the IRDA must seriously initiate policies to provide health coverage to all the vulnerable sections of the Indian population. Considering the low penetration of the health insurance, this sector offers huge possibilities.
The non-life insurance industry concentrated on corporate business for a very long time. This excessive concentration was at the cost of neglecting the individual and personal lines of businesses. In the recent period the public sector has taken up the initiative in designing and selling products to insure the risk of the petty businesses and the households. The asset owning class has considerably grown in India. This class provides new opportunities. There is a perception that claim settlement in the non-life sector is tardy and difficult. This perception comes from the motor insurance where huge underwriting losses are recorded. In this segment action from both the government and the IRDA has become urgent. There are suggestions that the government must amend the Motor Vehicle Act to limit liability in motor insurance. Such limitation exists in aviation and railways. This is a reasonable suggestion and the government should act on this to make the process of claim settlement arising out of injuries and death under motor insurance easy and smooth.
The insurance market looks attractive in India. It holds huge potential for the future. This potential should be exploited through the combined initiative of all interested parties and by developing a skilled sales force. The individual agents are the assets. These assets have to be properly developed and harnessed. Though the corporate agencies and the bancassurance have made some successes, still it is the individual agents that drive the growth. The IRDA is contemplating to sallow the banks to sell products of more than one insurance company. This has serious consequences for the consumers and therefore the IRDA should re-think on this issue.
NEED FOR CAUTION
The impressive performance of insurance industry in the last one decade is being interpreted as the success of neo-liberal policies. This is hardly true. The global financial crisis has shattered nations and the world economy. Though it was primarily a crisis of the banking sector, this crisis also impacted the insurance companies in the United States and other industrialized nations in an adverse manner. These insurance companies suffered on two counts. Some of them accumulated significant exposure to credit default derivates and suffered heavily. But almost all insurance companies in the developed nations had increasingly visible impact through their investment portfolios. A number of insurance companies had to be bailed out by the governments and the AIG bailout was the biggest of them all.
The crisis in the banking and the financial sector must make the Indian government cautious. It must re-assess its policies in this important sector. But unfortunately, the government unmindful of the developments across the world has decided to further liberalize the financial sector. The government brought two bills in the Parliament in this direction. Both these bills met stiff resistance not just from the insurance employees movement but from the people and elected representatives cutting across the party lines. The government was forced to retreat on the LIC (Amendment) Bill 2009 that laid the roadmap for the privatization of LIC. But the Insurance Laws (Amendment) Bill 2008 seeking to hike FDI limits in insurance sector and privatize the non-life public sector industry is still pending in the Parliament.
Today the policies based on Washington Consensus are being challenged across the globe. The economic models based on minimal State intervention and promotions of private enterprise are being questions. In Latin American and a number of other countries the State control over strategic resources is increasing. India must also ponder over these developments and take corrective steps to bring the economy on the path that can help equitable development.
Unfortunately the Indian government is obsessed with foreign capital. It has made development hostage to the foreign capital. It is arguing that this country cannot grow without the foreign capital. This is a fallacious understanding. Today the world is seriously debating the so-called beneficial effects of FDI on the recipient economy. The World Bank appointed Growth Commission headed by Noble Laureate Dr Michael Spence has concluded that ‘foreign saving is an imperfect substitute for domestic saving, including public saving to finance the investment a booming economy requires’. Domestic capital helps the capital formation. It is necessary that in a developing economy the State exercises greater control over the domestic savings. But the Indian government by proposing to hike the foreign equity limits is allowing the foreign capital to gain greater access and control over the domestic savings. This surely will harm the interests of the nation. Though the Standing Committee on Finance rejected the proposal to hike the foreign equity limits in insurance, it is still not clear if the government would accept this suggestion.
Through the Insurance Laws (Amendment) Bill, the government also intends to divest the equity in the GIC-Re and four public sector companies. The government is arguing that these companies require capital for expansion and this can be raised only through the market. This is absolutely not true. These companies have over the years built huge assets and reserves and are capable of meeting the capital requirements through internal resources. Privatization of these companies is to hand over the precious national assets for private profits. The government must seriously review its policy both on the FDI and privatization of the State owned non-life companies.
Financial Sector plays a very important role in the national economy. Certain moves of the government in this sector have raised serious concerns. The government sometime back had announced that the insurance industry would be permitted to develop products like credit default derivatives and interest rate derivatives. The global financial crisis has halted these moves. This policy has serious repercussions for the insurance industry and the national economy and therefore should be opposed. The government has also decided to allow greater participation of foreign banks in India. It has introduced the Banking Laws (Amendment) Bill in the Parliament proposing to remove the cap on voting rights for the foreign capital and permit more banks in the private sector. Both these proposals are harmful to the banking sector and the national economy.
The global financial crisis that hit the economies across the world in 2008 did not impact India in a significant manner. There is a wide consensus that India escaped the disaster because public sector continues to dominate the banking and insurance and they did not have any exposure to the instruments that brought this disaster. The second factor that helped is that the country did not fully adopt the capital account convertibility despite pressures from the interested quarters. It is time for India to revisit the neo-liberal policies. The further opening up of the financial sector must be halted. It must be realized that finance capital is fundamentally in search of quick profits and hence speculative in character rather than having any enduring links with the industry. This fact must force the government to review its entire FDI policy.
The progress made by the insurance sector in the last one decade has to be consolidated. The public sector should be given all support to reach out to the poor and under-privileged to meet their needs. Rather than further liberalization of the sector, the government and the IRDA must concentrate their efforts on the orderly growth of the insurance industry.
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