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Business Commentary/Dilip Thakore

The case for deregulating the insurance sector

One of the great and enduring mysteries of the momentous Indian economic liberalisation and deregulation initiative begun way back in 1992 and on which issue there is a reported national consensus, is why the insurance business has not been opened up for private sector investment and participation.

The subject of permitting private and foreign investment in the general insurance business in particular has been discussed threadbare. And it is plain as a pikestaff that the advantages of deregulation -- which translates into breaking the stultifying monopoly of the Union government owned General Insurance Corporation -- overwhelmingly outweigh the disadvantages.

The latest in this long-running serial is that a group of Union ministers, including the finance, commerce, energy, petroleum and law ministers, has been constituted to deliberate upon the extent of foreign investment which should be permitted in the general insurance business.

According to a draft proposal which this group of ministers will deliberate upon, the equity shareholding of foreign insurance companies in private sector Indian insurance companies should be restricted to 26 per cent though other foreign financial institutions, non-resident Indians and other foreign corporates together could own another 40 per cent of the equity.

In effect, this means that the indigenous promoters of insurance companies will have to own at least 34 per cent of their companies' equity if they wish to enter the insurance business.

Monitors of the economic scene who experience a sense of deja vu or even a big yawn at this latest stalling tactic of the government can hardly be faulted.

Ever since the Malhotra Committee recommended the opening up of the general insurance business to the private sector and foreign investors in 1994, the permutations and combinations of private sector participation in the insurance business have been discussed ad nauseam. But for all the kinds of mysterious reasons, the main recommendation of the carefully argued Malhotra Committee report has been side-stepped.

In the circumstances it is necessary to examine the real reasons why deep down all the political parties -- indeed the entire political class -- is opposed to the breaking of the GIC monopoly of the general insurance business (and of the LIC monopoly of the life insurance business).

The usual reasons advanced are that the entry of private sector especially foreign companies into the insurance business will result in a sharp rise in premia which will restrict insurance coverage to the urban rich.

Conversely, proponents of the status quo argue that private sector and foreign insurance companies will under-price themselves and grab the lucrative urban and industrial markets, leaving the less profitable rural insurance market for the nationalised companies. The cross-subsidisation which the nationalised companies provide for farmers and rural folk will die an early death.

Everyone who knows anything about the Indian economy knows how spurious is this argument. While it is true that the premia payable by Indian farmers for crop insurance are very low, it is also true that India is perhaps the world's most under-insured nation. The field staff and the agents of the GIC and its four wholly-owned subsidiary companies seldom bother to venture out into the rural hinterland to sell crop or any other insurance.

Moreover, notwithstanding the fact that rural India is characterised by mass illiteracy, the paperwork is cumbersome and complicated. Given the woeful lack of penetration of the rural market by the GIC subsidiaries, it is hardly surprising that a growing number of farmers across the country are resorting to the extreme remedy of suicide when their usually uninsured crops fail.

Yet the real reason why almost all political parties are hesitant about permitting private sector entry and competition into the general and life insurance business is opposition from the powerful trade unions which have virtually captured the cash-rich GIC and LIC.

The highest paid employees of the public sector, the estimated half-a-million employees of the nationalised insurance companies, are characterised by abysmal productivity, utter ignorance of the basic principles of the insurance business, endemic corruption, gross indiscipline and sheer laziness.

Dominating the inevitably weak managements of the nationalised insurance companies, the militant and strongly unionised employees of the nationalised monopoly insurance companies have transformed Indian insurance from volume-driven into class-based business.

The basic operational principle of the life and general insurance business is that coverage is sold and premia are collected from many millions of customers on the presumption that payout of damage claims will be small as a statistical percentage of premia collected. This basic operational principle of the insurance business necessitates the widest possible dissemination of insurance coverage and inculcating the insurance habit within the population.

However, the closed-shop unions of the nationalised insurance companies have turned this basic operational principle on its head. The nationalised general insurance companies thrive on selling a small number of high-premium policies to large, capital-intensive companies than to a large number of small businesses and households.

Yet a thriving insurance sector is of vital importance to every modern economy. First because it encourages the savings habit; second because it provides a safety net to tax-paying and/or employment generating rural and urban enterprises and productive individuals. And perhaps most importantly it generates long-term investible funds for infrastructure building. The nature of the insurance business is such that the cash inflow of insurance companies is constant while the payout is deferred and contingency related.

This characteristic of their business makes insurance companies the biggest investors in long-gestation infrastructure development projects in all developed and aspiring nations.

This is the most compelling reason why private sector (and foreign) companies which will spread the insurance habit in the societal and consumer interest are urgently required in this vital sector of the economy.

With the nation's development infrastructure in a state of imminent collapse, India cannot afford to be lumbered with sub-optimally performing monopoly insurance companies.

Dilip Thakore