The LIC completed another eventful year in its spectacular journey. At 58, LIC today stands proud as the finest financial institution in the country proving ail its detractors wrong. The AIIEA raised the demand for nationalization of insurance business in 1951 and achieved significant success with the nationalization of life insurance business and setting up of LIC in 1956, while overwhelming sections of the employees and general public agreed with this demand, there were also some skeptics who felt that nationalization will lead to State capitalism. The AHEA raised this demand with a clear understanding that public sector is not the socialization of the means of production but nevertheless it serves some important purpose in the process of building a self reliant modern nation-state. The AHEA was aware that a poor developing nation will have to face enormous pressures from imperialism and public sector has the potential to work as a bulwark against these pressures and machinations. The AIIEA was also clear that with the State taking control over the insurance business, the small savings mobilized could be used to finance the social and infrastructure needs that would benefit the people and economy. The performance of LIC in the last 58 years has fully vindicated the understanding of AIIEA.
The LIC is an amazing story of success. It has become a household name in the country. It has earned the trust and admiration of the people through ceaseless efforts to expand the insurance market and by setting very high standards of policy servicing, most important being claim settlement. The LIC today has 30 crores in-force individual policies and another 11.54 crores lives have been covered through group insurance. It has built assets of Rs.17, 69,191 crores on a capital of Rs.5 crores which was raised to Rs.100 crores in 2011. The total investments of LIC in Government securities and social sector stand at Rs.1069769 crores as at the end of March 2014. Its contribution to the 11th Five Year Plan amounted to Rs.704151 crores and in the first two years of the 12th Plan, it has already contributed Rs.452460 crores. No other financial institution comes anywhere close to LIC in terms of contribution to the national development.
The year 2013-14 continued to be difficult for Indian economy. The economy registered a sub-five percent growth during this period. The high rate of inflation coupled with high rate of unemployment stifled the economy. This had a great impact on the rate of domestic savings. The household financial savings declined from 10.3% in financial year 2011 to 7.7% in 2013. Consequently the share of life insurance in the financial savings fell from 19.4% in financial year 2011 to 16.4% in 2013. It is reported that financial assets accounted for only a third of household savings in 2012-13 down from half in 2006-07. There is a clear shift to savings in gold and real estate to beat the inflation. Such low levels of financial savings were not seen in the last fifty years.
The global situation is no different. The global economy is yet to recover from the financial meltdown of 2008. The impact of this crisis is seriously felt on the global insurance industry. Since the financial crisis in 2008, the advanced industrialized nations are experiencing stagnation in premium income. The annual growth rate in North America is (-) 2.9%, Oceania (-) 3.7% and Western Europe (-) 0.6%. For the year 2013, the global life insurance industry registered a marginal growth of 0.7% from 2.3% in 2012. The premium collection in the United States declined by 7.7% in 2013 and Europe remained stagnant (Sigma Report 3/2014). As a result of this, the industry experienced a massive decline in the average global insurance penetration.
Yet a credible performance
The LIC had to perform in this background and it did perform exceedingly well. It has earned a first year premium income of Rs.90123 crores selling over 3.45 crores policies for the year 2013-14. It continues to dominate the market both in terms of premium income and number of policies. It has a market share of over 75% in premium income and 84% in number of policies during this period. The total premium income of LIC stood at Rs.236798 crores registering a growth of nearly 14 percent. It settled 99.68% of the maturity claims and 993% of the death claims. This claim settlement record remains unmatched in the world.
The public sector general insurance companies too performed very well. The four companies earned gross direct premium income of Rs.43292 crores during the year 2013-14. The public sector companies dominated the market with a share of 56 percent. The investments of PSGI companies stood at Rs.101707 crores. These companies together paid the government a dividend of Rs.598.66 crores for the year 2013-14 on a capital of Rs.600 crores.
The why these steps to weaken?
ln the background of such good performance, it is natural to expect that the government would further strengthen the public sector insurance industry so that it plays a still bigger role in the national development. But this is not to be. On the contrary, the government is taking all steps to weaken the public sector through a hike in foreign direct investment limit from 26% to 49% and to privatize the PSGI companies. The AIIEA has been resisting these moves through mobilization of public opinion. This struggle has succeeded in stalling the FDl hike for the last 10 years and privatization for the last 20 years. The determined efforts of the BJP led NDA to secure approval of the Insurance Laws (Amendment) Bill 2008 met with spirited challenge from the movement led by AHEA. The BJP which stoutly opposed this Bill when in opposition showed unimaginable hurry to get it passed. This Bill allows both the FDl and Fll investments within the limit of 49%. It is strange that when there is an overwhelming opinion against the FDl hike, the Modi government wants to offer a space to FH investments. It does not need any expert to say that Fll investments are volatile and speculative and by allowing such investments in insurance sector, the government is jeopardizing the safety of savings in insurance. This Bill allows privatization of PSGI companies. The foreign capital is permitted to operate in special economic zones without coming under the supervision of the regulator and free from all labor laws. The assets of the insurance companies in foreign countries would be taken into account to determine the solvency requirements in India. These are far reaching amendments to the existing laws. The campaign of AIIEA succeeded in making the opposition political parties including Congress to put up a united resistance in the Parliament. The struggle secured some advancement with the Bill being referred to the Select Committee for further scrutiny.
The corporate media made a frenzied campaign in favor of the Bill. Half truths and falsehood were liberally used to manufacture public opinion. These efforts did not succeed. There was a concerted campaign to suggest that only 6 percent of the Indian population has some kind of life insurance. Nothing can be farther from the truth. Though the population of India is 127 crores, the insurable population is estimated at 60 crores and the number insured through individual assurances is estimated at 30 crores. This is the assessment of the Life insurance Council of India. This apart nearly 12 crores lives have been covered by LIC alone through the group insurance schemes. This makes it clear that more than 70 percent of the insurable population has been covered. Considering the income levels, meager disposable incomes and nearly 1/3M of the population, according to the President of India, suffering from grueling poverty, this is something really great and has come in for appreciation even from World Economic Forum. It is pertinent to mention that the WEF has placed India at the top of global ranking in terms of life insurance density, Therefore, to mislead the nation that only 6 percent of the population is covered by life insurance is not only a gross under-estimation of the achievement but also an outright lie.
The criticism on low life insurance penetration is either based on ignorance or a deliberate ploy to mislead the public. The expansion of the life insurance business depends on growth of the economy, income levels and disposable incomes. It is an undeniable fact that the life insurance penetration in India is much higher than that in countries where income levels are often ten times more than that in our country. Let it be clear that the life insurance penetration in India is more than all the countries in Latin America, Eastern Europe and many industrialized nations. The life insurance penetration at 3.1% in India in 2013 compared favorably with the United States at 3.2%, Canada 2.9%, Germany 3.1%, Spain 2.5%, China 1.6%, Australia 3% and New Zealand 0.9%. There cannot be any doubt that all these countries enjoy a huge advantage over India in terms of levels of incomes and disposable incomes. The World average is 3.5%. Therefore, the criticism that life insurance penetration is low is absolutely baseless. Rather, the efforts of LIC in expanding the insurance business must be appreciated. However, it has to be agreed that Indian life insurance business has massive potential with a very young population and this will surely be exploited if the economy creates jobs and the income levels increase.
General Insurance has not done badly either
In the ten year period from 2003-04 to 2012-13, the non-life gross written premium has grown at a compounding annual growth rate (CAGR) of 17.2% (General Insurance Council). During this period the real GDP grew at a CAGR of 7.9%. This clearly shows that the general insurance business grew much faster than the Indian economy. It should also be noted that this growth of 17.2% is much better than the growth registered by the industrial and services sectors. Yet it is true that the non-life insurance penetration is low. But this is due to the fact that this country has huge income disparities and the asset holding class is just a fraction of the population. Nevertheless, penetration increased from 0.62% to 0.8% in 2013. The insurance density too increased from Rs.153 to Rs.571.
The relationship between the economic well being and insurance penetration can be seen from the fact that the 6 union territories in India have the combined penetration level of 2.23% while in the bottom 10 States, the penetration level is 0.46%. While the non-life insurance penetration is 1.4% and density is Rs.2994 in Delhi, it is 0.47% and Rs.183 in UP and 0.55% and Rs.274 in Madhya Pradesh. These wide disparities in Insurance penetration reflect the reality of India and its uneven development. Therefore, it is not surprising that the performance of the Indian general insurance industry is rated very high by the World Economic Forum. The WEF has placed India at No.3 in global ranking in non-life Insurance business.
It is also strange that the finance Minister has suggested consolidation of Banks in his Budget proposal. But the government is refusing to accept the consolidation of the public sector general insurance industry. Such a consolidation will help acquiring the necessary skill and financial clout to further advance the interests of the Indian people and economy.
Will funds flow if the FDI is hiked?
The BJP led NDA government was keen to secure the passage of Insurance Laws (Amendment) Bill 2008 before the visit of Prime Minister to United States to demonstrate its commitment to fully open the national economy to foreign capital. There are arguments that if the FDI is hiked in insurance, more than 10 billion dollars will flow into the sector which is capital starved. It must be stated that the industry is neither capital starved nor is there any direct link between the capital employed and the premium earned. The FDI in life insurance remains at Rs.6046 crores as at the end of 2013 (just around 1 billion USD). The total capital employed in general insurance (Indian+foreign) by 19 private companies stands at Rs.5975 crores. It must also be noted that there is no significant increase in the capital in the general insurance since the opening up of the sector, Therefore to expect that 10 billion dollars will flow once the FDI is hiked is just a wishful thinking. The assessment of foreign partners bringing in a portion of their global premium income in infrastructure made at the time of opening the sector has gone horribly wrong. There is no evidence to show any such FDI inflow. Therefore, to expect that the FDI hike will result in massive inflow of foreign capital is contrary to the experience since the opening of the sector.
Why then liberalize this sector?
There are no justifiable reasons for FDI hike or destabilizing the public sector through privatization. The FDI hike is neither in the interest of the national economy nor the insuring public. It is just the blind pursuit of the much discredited neo-liberal policies and placing faith in foreign capital for the revival of the economy. Let it be clear that the basic characteristic of capital, whether Indian or foreign is to search and maximize profits and no investments are made in compassion to Improve the life of Indians. The foreign capital has set its eyes on the huge potential for profits in insurance industry. The biggest advantage India offers is its young population. Therefore, it is estimated that life Insurance has the potential to grow nearly 2.5 times its current size by the year 2020. The non-life insurance business is also set to grow at a fast rate. The household savings is estimated to touch 30% of the GDP in the next few years. This is an extremely attractive market for the foreign capital considering the aging population and stagnating markets in the industrialized countries. Should India allow the foreign capital to gain control and access over the domestic savings or the State continue to retain control for the benefit of the nation? The opposition to the FDI hike cannot be brushed aside just as an ideological position. It is an issue of hard economics and impact on the people and the national economy. It will be bad economics if the government hands over the control of precious domestic savings to the foreign capital. Therefore, the resistance against the FDI hike and privatization of public sector must continue with conviction and determination.
*The article is written by Amanullah Khan.
(Courtesy: Central Zone Insurance Employees’ Association, affiliated to All India Insurance Employees’ Association)
*You can visit www.cziea.org for further readings.
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