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Business Commentary/ Dilip Thakore

National interest demands foreign investment in insurance

To all intents and purposes, it looks as if the three-penny comic opera of the insurance business is over. The 13-party Bharatiya Janata Party-led coalition government in New Delhi was almost ripped asunder by dissension over the long overdue reform to break the state monopoly of the general and life insurance business.

It was a near thing. The BJP itself, the single largest party in Parliament, was nearly split into warring factions as the non-parliamentary party leadership and the Swadeshi Jagran Manch -- the think-tank organisation of the Rashtriya Swayamsevak Sangh, the Sangh Parivar -- expressed vehement opposition to foreign investment in the government-dominated life and general insurance business.

Allying with strange bedfellows including the insurance companies' militantly unionised employees and the Communist parties, the BJP hardliners, with the SJM's backing, threatened to bring down the 10-month old government on this issue.

The Sangh Parivar's opposition to the entry of foreign insurance companies into the Indian marketplace, though misguided, is hardly surprising. When an identical IRA bill was tabled in Parliament by the late unlamented Janata Dal-led coalition government some six months ago, BJP members of the Lower House filibustered and disrupted parliamentary proceedings forcing the withdrawal of the bill.

Now the leaders of the very same BJP are pushing an almost identical IRA bill. This amazing volte face which underscores the irresponsibility of the BJP in Opposition, has not surprisingly confused the rank and file of the Sangh Parivar and the BJP, and earned the government a public rebuke from BJP president Kushabhau Thakre.

Fortunately for the nation, the hitherto all-too-malleable Prime Minister Vajpayee has chosen this issue to dig in his heels and assert his authority within the Cabinet and government. Fortunately because the Indian economy desperately needs the insurance business the giants are likely to inject into India's nationalised insurance sector.

As the national debate on the pros and cons of opening up the insurance sector to indigenous private and foreign companies has been gathering momentum, it has become increasingly clear that India is a grossly under-insured country. The nationalised General Insurance Corporation and Life Insurance Corporation, though they boast impressive bottomlines, have failed to spread the insurance habit within the general populace.

This is indicated by the telling statistic that insurance premia aggregate to a massive 17 per cent of GDP in the US (and 9.2 per cent average in the G-7 countries) as opposed to barely 2 per cent of GDP in India. And it is pertinent in this context to bear in mind that the GDP of the US is almost 100 times the size of India's.

The bald truth is that GIC in particular has done precious little to promote the insurance habit within the general population. When is the last time you received a solicitation for home, fire or theft insurance from any of the four constituent companies of this nationalised corporation? Virtually captured by its militant, unionised employees, GIC has been content to chase small-volume high-premia business rather than millions of low premium paying customers as it should have been doing.

The sheer indolence and irresponsibility of the GIC management and employees was graphically brought home to me when I was in the direct marketing business a few years ago. The way I saw it there was a huge market for GIC in the home insurance business. After all people invest their entire life's savings to buy a home. Therefore they would be more than happy to insure their homes against fire, flood, riots etc that citizens are heir to.

So why not do a direct mail campaign to every home owner in the country offering him insurance?

Impossible, a senior manager of the corporation (a Cambridge graduate, no less) informed my astonished ears. The unionised field staff of GIC's constituent insurance companies do not like to go door-to-door to sell insurance. They would rather sell general insurance to a few big companies with expensive plant, machinery and premises than chase after millions of small premia customers.

And the management of the nationalised insurance companies did not want any trouble from the unions. But what about the example of the Prudential Assurance Company of the USA which direct mails over 60 million households annually offering a laundry list of insurance services?

We are like this only.

Which perhaps explains why the monopoly GIC is smaller than most branch offices of Prudential and thousands of farmers and small businessmen in India commit suicide when their uninsured crop and businesses suffer natural calamities.

If at all, the operational style of the nationalised monopoly Life Insurance Corporation of India is only marginally better. Despite having been in business for over 40 years, LIC has sold barely 25 million policies which is not impressive at all given that there are an estimated 170 million households in India.

It is pertinent also to bear in mind that a significant number of policies issued by LIC are add-on policies. That is, one person purchasing several policies. Moreover, a large percentage of issued policies are likely to have lapsed because LIC agents and staff seldom bother to remind policy-holders to pay their annual or other term premia.

Therefore the injection of a modicum of competition and expertise into the nation's moribund insurance business is the most compelling argument in favour of the entry of foreign and private investment into this sector.

Yet several spurious arguments advanced by the pampered and indolent employees of the nationalised insurance companies have been given wide currency. One of them is that if the foreign insurance giants get a foot into the door they will dominate this business. And secondly that they will repatriate large sums of money to their parent companies.

Briefly, both these arguments are severely flawed. Although foreign insurance companies have been doing business in Malaysia for over 50 years all of them put together have not cornered more than a 10 per cent share of the insurance business in that country. Indeed in no Asian country except Indonesia (20 per cent) have foreign insurance companies been able to acquire more than 10 per cent market penetration. Likewise since insurance companies' funds tend to be invested in long-term infrastructure building projects, repatriation of premia is likely to be negligible.

To modernise its crumbling infrastructure and industries the Indian economy needs Rs 250 billion per year. Long-term investible funds of this magnitude can be mobilised only if the insurance habit is widely spread within the population. This task has proved to be beyond the capabilities of the nationalised insurance companies. So it is time to roll out a bright red carpet to foreign insurance companies. The national interest demands it.

Dilip Thakore

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