When bare necessities are difficult to afford for many, buying insurance can’t be expected to be part of the people’s expense planning. The Govt must pay the bulk of the premium
The three announcements regarding insurance in the Union Budget have majorly contributed to the post-Budget share market rally. First is the Government’s plan to allow up to 74 per cent foreign equity in insurance companies against the existing 49 per cent. Second is privatisation of one public sector general insurance company and the third pertains to the planned Initial Public Offering (IPO) of the Life Insurance Corporation (LIC). Insurance is risk management involving a group of individuals who give away a part of their earnings against a guaranteed return of a lump sum financial support in case of any personal crisis. The success of such a scheme depends on how many in the group are at high risk of actually facing the crisis. The bigger the group is, the more dispersed the risk is and more successful the scheme.
During 2018-19, the Indian insurance industry covered 120.75 crore lives under personal accident insurance. Of it, 94.71 crore were covered under Government-sponsored schemes like the ‘Pradhan Mantri Suraksha Bima Yojana’, ‘Pradhan Mantri Jan Dhan Yojana’ and the Indian Railways Catering and Tourism Corporation’s (IRCTC’s) travel insurance plan. In addition, 2.07 crore health insurance policies were issued covering 47.20 crore individuals with 75 per cent of them covered under Government-sponsored schemes. In 2017, a whopping 32.8 crore life insurance policies were in force so almost 75 per cent of the Indian population has life insurance cover.
The performance and potential of the insurance sector is assessed using twin indicators of ‘Insurance Penetration’ that is a percentage of the insurance premium to the Gross Domestic Product (GDP) and ‘Insurance Density’ that is defined as the ratio of insurance premium to population. In India, Insurance Penetration has steadily increased to 3.76 per cent in 2019 from 2.71 per cent in 2001. In contrast, Insurance Penetration in Malaysia, Thailand and China was 4.72, 4.99 and 4.30 per cent, respectively in 2019. As of 2019, life insurance penetration in India was 2.82 per cent, while non-life insurance penetration was only 0.94 per cent whereas globally insurance penetration was 3.35 per cent for life and 3.88 per cent for the non-life segment.
India is ranked 10th in life insurance and 15th in non-life insurance among the 88 countries for which data was compiled by Swiss Re. However, India’s share in the global insurance market was only 1.92 per cent during 2018. Global direct premiums surpassed the $5 trillion mark for the first time ever in 2018, reaching $5,193 billion (which is 6.1 per cent of the global GDP). Life insurance penetration in the country is 3.6 per cent of the GDP, way below the global average of 7.13 per cent and, in the case of general insurance, it is even worse at 0.94 per cent of the GDP, as against the world average of 2.88 per cent. This is not surprising because the average per capita income is low and as many as 82 crore people hold ration cards for getting subsidised food grain. Many more have been claimed to be added to this list. Obviously, when bare necessities are difficult to afford for a huge section of the population, buying insurance can’t be expected to be part of the people’s expense planning in India. Of course, if the Government pays bulk of the premium, this segment of the population can be covered. This is indeed being done through schemes like the ‘Pradhan Mantri Jeevan Jyoti Bima Yojana’ and ‘Pradhan Mantri Shram Yogi Maandhan Yojana.’
At the end of March 2019, there were 70 insurance firms including 24 life insurers, 27 general insurers, seven standalone health insurers and 12 re-insurers including foreign reinsurers branches and Lloyds India, eight in public and 62 in private sector. Investments made by the insurance industry stood at Rs 38,47,474 crore of which the share of life insurers was 91.83 per cent and the share of Public Sector Undertakings (PSUs) was 76.40 per cent. As financial literacy spreads and digital technology reduces the on-boarding cost of new customers of insurance products, it should be possible to spread the insurance network far and wide. Despite the dominance of the public sector, insurance penetration is low and, therefore, there is a need to bring more competition, more efficiency and more technology.
Insurance is a capital-intensive business and requires long-term investment from promoters to ensure compliance with the Insurance Regulatory and Development Authority of India’s solvency requirements (a prescribed asset-liability test). Indian insurers need additional capital and technical know-how from foreign partners to scale up and offer more sophisticated and innovative products. That is the justification for allowing Foreign Direct Investment (FDI) in Indian insurance companies. The FDI cap on insurance companies was raised from 26 per cent to 49 per cent in March 2016. In 2015, the Government permitted Indian insurance firms to have up to 49 per cent foreign investment provided they remained “Indian-owned and controlled” and even in the latest Budget proposal, foreign ownership and control of Indian insurers will be permitted with some safeguards. For instance, a majority of the Board of directors and key management persons of the insurance company must comprise of Indian residents and 50 per cent of the Board must comprise of independent directors. Further, to ensure that sufficient capital is retained in the books, foreign-owned insurers will be required to hold a specified percentage of the profits as “general reserves.”
As on March 31, 2019, the total FDI was Rs 13,810 crore, that was Rs 8,328 crore short of the permissible FDI limit. Private sector insurers who attracted this FDI have mobilised insurance savings and invested more than Rs 9 lakh crore with Central and State Governments and Indian companies. They have not been allowed to take this money out of India; a major concern the opponents of FDI in insurance have always had.
Several insurers have been restricted from expanding as the 49 per cent foreign investment cap prevented foreign shareholder from infusing capital due to the inability of cash-strapped Indian Joint Ventures (JV) partners to bring additional capital. The Reserve Bank of India is also seeking to cap banks’ investment in insurance companies to 30 per cent to isolate them from risks emanating from non-core businesses. That also restricts the availability of capital for insurance firms. As far as the IPO of LIC is concerned, it has little to do with insurance penetration and lack of capital among private insurers.
The LIC has an excellent record of service with claim its settlement ratio being 97.79 per cent. On an equity of Rs 100 crore, the LIC earned a profit of Rs 2688 crore and paid dividends of Rs 2661 crore in 2018-19. It had outstanding investments of Rs 27,60,658 crore against which of course are the liabilities to policyholders. So policyholders’ funds versus shareholders’ funds are intricately and uncertainly mixed up. It is a very precious company whose market value once listed can at present be only a matter of guesstimate. Some commentators have put the value in the range of over Rs 10 lakh crore. The Government has appointed actuarial firm Milliman Advisors for ascertaining the embedded value of the LIC. The Government’s shareholding is likely to go down from 100 per cent to 90 per cent and that can give about Rs 1,00,000 crore by a conservative estimate, a handsome premium, and also a chance to retail investors to participate in LIC’s growth story. It is a win-win for the Government and the capital market.
The Government is likely to reserve 10 per cent shares in the IPO for LIC policyholders. It would be desirable to reserve a large quota for policyholders, retail investors and individual taxpayers. It will also boost LIC’s business and valuation as more policies are bought to qualify for IPO participation.
The writer is former Special Secretary, Ministry of Commerce and Industry. The views expressed are personal.
