Government needs to retain some control over domestic savings instead of allowing foreign investors to enjoy control over Indian savings

For nearly two decades, the biggest union in the Indian insurance industry, the All India Insurance Employees’ Association (AIIEA), (Formed on 1-7-51 and instrumental in nationalizing the insurance business in India) has opposed the entry of foreign capital in the insurance industry
BRIEF HISORY on  19th of January, 1956, the management of the 245 private  life insurance companies was taken over by means of an Ordinance and later the ownership too .The Life Insurance Corporation was formed on 1st September, 1956 through an act in the parliament,(With a view to protect the interest of insurance public) and with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.
The Insurance sector was opened up for private sector in the year 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999). This Act also permitted foreign shareholding in Indian insurance companies to the extent of 26 per cent in order to provide better insurance coverage and to augment the flow of long term resources for financing infrastructure.
The Insurance Laws (Amendment) Bill, 2008 was introduced in Rajya Sabha on 22 December, 2008 which was referred to the Parliamentary Standing Committee of finance headed by Sh.Yashwant Sinha former finance minister, placed its report in the parliament, on 13th December 2011 recommended that the cap on foreign direct investment (FDI) be retained at 26 per cent. It also said that “the government seems to have decided upon this issue without any sound and objective analysis of the insurance sector following liberalization”.  Cautioning the government of the global financial crisis, the Committee has recommended to the government that the private companies may explore avenues to tap the domestic capital instead of increasing the FDI limits.
 Since 1956The LIC is performing very well, AS on 31.03.14 LIC is having
Total Policy holder---More than 40 Crore(Including Group Insurance)
LIC’s Total Life Fund---16, 07, 024.98 Crores
LIC’s Total Assets---17, 69,191.60 Crore
The ultimate yardstick to judge the performance of an insurance company is to see how quickly it settles claims. The LIC is perhaps the best in the world in this regard
Percentage of Maturity Claim settled---99.68%
Percentage of Death Claim settled---99.30%
Dividend paid to Govt. for 2012-13---1436.38 Crore
Taxes paid to Govt. ---6373.00 Crore
And today LIC is dominating the life insurance market today with 75.33% share in premium and 84.44% in the number of policies
The two major arguments in favour of increase in the foreign equity limits are:
(1)    The private insurance companies are starved of funds and it has become inevitable to increase the FDI limit; and
(2)    The increase in the FDI limits will help deepening the insurance market and increase the levels of penetration.  The resources so generated will help funding of long term infrastructure projects.
Main reasons for opposition to FDI in insurance
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% 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.
The issue of foreign equity is often linked with induction of new technology and products. In the insurance sector, there is no technology needed to be brought in from other countries.  The mortality rates and other principles of insurance are based on the Indian conditions, because the policyholders are from this country.
Insurance is a long-term contract. An insurance company deploys funds in long-term investments in order to be able to pay claims that may arise in the future. Insurance funds are thus suitable for developing national infrastructure and capital formation. In a developing country like India, the government needs to retain some control over domestic savings instead of allowing foreign investors to enjoy control over Indian savings.
 The Insurance Regulatory and Development Authority (IRDA) had said that companies that have been in business for 10 years can raise fresh capital. If they really do need capital, why not go to the market to raise resources? Why do they have to look to foreign capital? The simple reason is that India is still an attractive market for foreign capital in the medium to long term. The insurance markets in advanced capitalist economies are in serious stagnation. They find the demographic composition of the Indian population very attractive — 65 per cent of Indians are under 35.
Lapsation ratio (defined as the proportion of policies that lapse after the first year 2010-110) of LIC = 4- 5% and Average of Private Co. is 20%
LAPSATION RATIO OF DIFFERENT COMPANIES
BIRLA SUN LIFE ……51%
FUTURE GENERALLI……49%
ICICI PRUDENTIAL…….42%
RELIANCE……….38%
BHARTI AXA……..36%
Policies lapse because the buyers, after paying the first premium, find that it does not suit their requirements. And, to make matters worse, the company can keep the money after misleading the consumer.
PERCENTAGE OF Repudiation of Claim of LIC is    1% in comparison to Pvt. Co. which is 8.9%
According of Life Insurance Council, The Private Sector has closed down 800 Branch Office in the Year 2012 on the plea of Non-Performances.
DURING THE PERIOD -2001-13    
Total FDI in Life Sector---6045.91 Crore
In same period LIC paid Dividend to Govt. ---10565.74 Crore
The FDI in insurance sector was allowed in 2001 and from 2001 to 2011 foreign capital has only Rs. 6,813 crores as equity in 33 private insurance companies.
While LIC alone provided for Rs. 7, 04,151 crores into social sector and infrastructure sector during the eleventh five-year plan (2007-12)
 In the first two years of 12th five year plan (2012-2017) until now it has contributed Rs 4, 51,460 crore.
Out of Total Investment in infrastructure by Life Insurance Industry, investment by LIC is 90%.LIC funds more than 25% of the Govt. borrowings
As per the report of Reserve Bank of India (2011-12) total FDI of $22 billion came into India whereas the outgo was $26.1 billion. The argument of the government that if FDI is allowed more in insurance and other sectors, resources necessary for infrastructure will be available is completely belied. Moreover as per the report of RBI, FDI in India has mainly come into the service sector (with an average share of 41%) in the past 5 years.
This clearly proves that for the growth of any developing economy, people's savings are a much better alternative than foreign investments.”Today there is a consensus world over that domestic savings play a large role in capital formation and economic development and therefore it is not prudent to allow the foreign capital greater access and control over the domestic savings by increasing the FDI limit.
The global insurance scenario is not very happy. Since the financial crisis in 2008, the advanced industrialized nations are experiencing stagnation in premium income. The annual growth rate in North American is (-) 2.9%, Oceania (-) 3.7% and Western Europe (-) 0.6%. (Sigma Report 3/2014). Moreover the demography has made insurance a difficult business to operate in these markets. Therefore, it is natural for the multinational companies to demand further opening up of the insurance sector in India which is very promising with a young population
Insurance Sector unlike manufacturing is not capital intensive. In many countries the start-up capital for an insurance company is much lower than in India. The high solvency margin and other regulations are so framed as to make it look that an insurance company cannot do business without FDI. (FDI in insurance – R.Ramakrishna – Actuary).
There are around 50 joint venture companies operating in the country both in life and non-life segments. The Indian promoters of these companies are big industrial and financial houses. They have enough resources including easy access to funds for deployment in case of need.  They also have the option of raising resources through initial public offerings.
It is not possible to accept that they lack resources for investment in their insurance ventures.
There is no relationship between the capital employed and the business procured. The following table justifies our argument. The data is as on 31st March 2013.

The above table clearly points out that higher capital does not mean higher mobilization of premium income. What bring increase in premium income are a better trained agency force and other efficient channels of distribution.
Insurance penetration and density depend upon the growth of the national economy and the disposable income in the hands of the people. Despite poor incomes and very little disposable incomes, India has done extremely well in insurance.
The World Economic Forum gave Indian Life Insurance industry the top global ranking and it ranked India     number 3 in general insurance business in terms of density. India’s global ranking is 11 in volumes of life insurance premium in 2013. (Sigma Report.)
The criticism on insurance penetration is unnecessary, though there is a great possibility for improvement. Life insurance penetration in India at 3.1% compares favorably with 3.2% of United States, 2.9% of Canada and 3.1% in Germany. India has a higher level of penetration than all the Latin American countries and many of the developed nations. We can improve upon this if the incomes levels and disposable incomes increase.
The argument that entry of private sector has deepened insurance market needs close scrutiny. We may point out that LIC recorded compound annual growth rate of 19.5% in the nineties. We strongly believe LIC would have continued to grow at this rate had the sector not been opened. With a 19.5% CAGR the total premium of LIC would have been Rs.337256 crore for 2013-14. Interestingly the combined TPI of LIC and the private companies is the same figure for 2013-14. This again makes it clear that the entry of private companies did not result into expansion of the market. Rather the private companies tried to capture a share of the market created by the public sector. It is also a fact that the private companies concentrated on the big ticket policies with no social obligation for the poor and disadvantaged.
We are, therefore, convinced that opening up the sector did not benefit the economy nor did it benefit the insuring public. The claims that opening up of insurance sector would open the floodgates for the foreign capital to benefit infrastructure remain unsubstantiated. The insuring public with high lapsation ratio and high rate of claim repudiation by the private companies has suffered. In the face of these realities, it is imprudent to give the foreign capital a greater space and control over the domestic savings.  We have real apprehension that FDI hike will only succeed in hastening the process of mergers and acquisitions which would have serious impact on the public sector and consequently the national economy itself. The claim that even when the foreign equity limit is raised to 49%, the management and control will remain with the Indians is unconvincing. With 26% equity participation the foreigners are now controlling the functioning of many of the joint venture companies. These moves are against the interest of the national economy and against the interests of the people whose savings are involved in insurance and pensions. So Increase in FDI would lead the increased control of the foreign finance capital over the savings of the people of India.
(The Author is Divisional Secretary, Northern Zone Insurance Employees’ Association, LIC of India, Divisional Office, Ludhiana.)