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Wednesday, 24 July 2013 00:00
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Monsoon session likely to bring insurance relief

Given the government appears to have got the JDU as well as the SP on its side, chances are Parliament may just clear the hike in FDI caps in the insurance sector from the present 26% to 49% in the monsoon session. Indeed, as The Indian Express has reported, even the BJP appears to be softening its stance, possibly because the party doesn’t want to be seen as one opposing every reform measure. More so since, as former finance minister and BJP leader Yashwant Sinha himself puts it, the 49% FDI proposal was originally that of the BJP. Indeed, Sinha’s argument that it was the Congress that forced him to dilute the 49% to 26% (with the balance 23% to come from NRIs and overseas corporate bodies) makes the BJP’s anti-insurance Bill stance even more curious. Some have argued that, post-Lehman, it is better to be safe than sorry when it comes to the financial sector, but this ignores the fact that there are prudential norms laid down by the regulator to ensure the safety of the money paid by customers. Ironically, the company with the lowest solvency ratio—a ratio which the IRDA is free to hike if it wants to, were it to consider the business is looking more risky—in the life insurance business is not a private sector company with an MNC partner, it is the government-owned Life Insurance Corporation (LIC). While LIC had a solvency ratio of just 1.54 as compared to IRDA’s minimum ratio of 1.5 in March 2012, that for SBI Life was 5.34, 3.71 for ICICI Prudential and 1.88 for HDFC Standard.


More importantly, the data make it clear that opening up the insurance market and bringing in private players has played a major role in changing the profile of the business. While India had a life insurance penetration—the ratio of the premium paid to the country’s GDP—of a mere 2.15 in 2001, this rose to 3.4 in 2011. Within a decade or so that private players have been in the business, they have already got a 30% share of the life insurance market, making it clear that their role has been critical. And getting this market share, it has to be added, has been a costly business with the cumulative losses of the private industry at around R18,000 crore. Since investors need a return on their capital, it is obvious that more investments will take place only when existing investors are able to see a higher return. Were FDI levels allowed to be raised, this would allow Indian partners to lower their stake if they like—and it would allow foreign partners with deeper pockets to plough in more to grow the business. Of the R25,000 crore of capital invested by private firms so far, under R6,500 crore has come in from the foreign partners since the FDI cap is just 26%. If the amended Bill gets through Parliament, this will be the first meaningful change in FDI caps made in a long time—the change in FDI caps announced last week didn’t really amount to much with the government not removing critical hurdles in either multi-brand retail or in pharmaceuticals where, as in the case of insurance, you actually have investors lined up waiting to invest.


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