Dividends of an insurance policy
8 Oct 2012 9:11 PM GMT
Reacting to the announcement opening 40 per cent foreign direct investment in insurance sector, leading politician, Sharad Jadav, observed that if you are opening up all industries and activities to foreign investment why not allow this in government. Effective and catchy criticism, no doubt. It should sell well with people and opponents of government. But it also reflects the attitude which refuses to take in the advantages that such opening up can deliver to the country. To say the most provocative thing to the opponents, opening up such industries to foreign investment can even benefit the so called aam aadmi.
Let us also take note of another more rational line of argument advanced by K D Singh, a businessman and now a political follower of Trinamool Congress chief Mamata Banerjee. He quoted some consultant’s report showing that insurance companies did not invest in infrastructure projects, rather they went on investing in equity markets. Hence, opening up of insurance sector to foreign investment is tantamount to making insurance schemes more risky, thereby putting the savings of common insurance subscribers to great danger.
Both these observations suggest that with opening up insurance sector to foreign direct investment, the government takes leave. There will be no authority any where and regulation of insurance companies – and for that matter, governance itself – may just go out of the window.
The fact of the matter is that insurance sector in India is fairly well regulated. With its growth, the regulatory system could be and should be strengthened. Regulation of insurance or other financial sector entities also include stipulating certain broad guidelines for their investments. Take for instance the Reserve Bank of India’s guidelines that require any bank in India to put no less than 24 per cent of its deposits in government securities under statutory liquidity ratio [SLR] provisions. Another 4.5 per cent of its deposits have to be kept with the RBI in cash. The RBI is empowered to periodically change these as required under its monetary policy.
Similarly, insurance companies have to compulsorily invest part of their funds in government securities and in various other categories of securities which are basically debts and therefore these are lower risk assets. In fact, a future insurance regulator, in its wisdom can impose a requirement that all Indian insurance companies having 49 per cent foreign direct investment will be required to place a certain proportion of their premium collections in infrastructure sector bonds. Already, we have seen some semi-official bonds – such as, IDBI infrastructure bonds – enjoying tax benefits. Such bonds may qualify for placing funds of the insurance companies as well.
If large funds flow into India following opening up the sector to higher foreign investment, the loss is not of India’s. After all, if someone chooses to bring in his money – and all money is hard earned, including money from overseas – the risk is for the one who is doing such deals. India is gaining in the process that such funds can supplement domestic availability of funds. If funds come into India from global insurance companies, these will not be spent for terrorist funding or for bringing down the Indian state. It should come in to earn some dividends at best. There is a common supposition in the country that if funds flow from overseas, these will invariably be for some nefarious activity in this country. This is nothing but a form of economic persecution mania. It is time we grow up.
Secondly, the world is not just waiting with bagful of money to pour into whatever is available in India. As a matter of fact, investors will have to be wooed to come and burn their money on Indian projects. China had most effectively done this after opening up and the results are for all to see. Today, China is in a position to dictate terms to the USA , it can lend its own money to Russia to lay pipelines for transportation of its gas and oil, the European Union comes to China’s doors to plead for funds to rescue its beleaguered debt-ridden countries and IMF looks upto to China to get supplementary assets.
It was not always so. China had to go out and present itself as a worthwhile destination for foreign investment. Even today, China is constantly at work to woo the large corporations of the developed world to come and invest, its ministers are constantly engaged with high officials of giant corporations to woo them into the country.
Funds flowing into India – and not going out – will always benefit. We have been watching the investment levels dropping in the country, as noted by none other than prime ministers’ Economic Advisory Council. Insurance companies coming into India will inevitably result in far greater competition in the insurance space and these will benefit no other than the common man. Large insurance investors are not just fly-by-night operators. They cannot salt away money from this country after coming in and investing in India. They would look forward to earning on their investment and that will mean sharing this with the government in the form of taxes.
On the other hand, in a fiercely competitive market, insurance companies – having foreign holding or not – will have to survive on the basis of its quality of service, the reliability of its performance and returns they give to their subscribers. If insurance products improve, will it not help the common man? You can argue that insurance is now subscribed by the rich and not poor. Are we looking forward to India’s poor ever remaining poor? Aren’t the poor getting a little better and eventually be able to buy insurance policies? Can we not devise insurance products for the poor?
One caveat: the policy for opening up the insurance sector has been denied to public sector insurers. The denial will work to their disadvantage. The capital appreciation that the public sector insurance giants could have been befitted. The private insurance companies and their existing owners will make a killing once the policy becomes operative. Their market capitalisation will catapult. But it will not happen to the much bigger public sector insurers by policy. What a shame.
This is happening because we are afraid of the market. We are artificially limiting the market for the public sector. [IPA]
Let us also take note of another more rational line of argument advanced by K D Singh, a businessman and now a political follower of Trinamool Congress chief Mamata Banerjee. He quoted some consultant’s report showing that insurance companies did not invest in infrastructure projects, rather they went on investing in equity markets. Hence, opening up of insurance sector to foreign investment is tantamount to making insurance schemes more risky, thereby putting the savings of common insurance subscribers to great danger.
Both these observations suggest that with opening up insurance sector to foreign direct investment, the government takes leave. There will be no authority any where and regulation of insurance companies – and for that matter, governance itself – may just go out of the window.
The fact of the matter is that insurance sector in India is fairly well regulated. With its growth, the regulatory system could be and should be strengthened. Regulation of insurance or other financial sector entities also include stipulating certain broad guidelines for their investments. Take for instance the Reserve Bank of India’s guidelines that require any bank in India to put no less than 24 per cent of its deposits in government securities under statutory liquidity ratio [SLR] provisions. Another 4.5 per cent of its deposits have to be kept with the RBI in cash. The RBI is empowered to periodically change these as required under its monetary policy.
Similarly, insurance companies have to compulsorily invest part of their funds in government securities and in various other categories of securities which are basically debts and therefore these are lower risk assets. In fact, a future insurance regulator, in its wisdom can impose a requirement that all Indian insurance companies having 49 per cent foreign direct investment will be required to place a certain proportion of their premium collections in infrastructure sector bonds. Already, we have seen some semi-official bonds – such as, IDBI infrastructure bonds – enjoying tax benefits. Such bonds may qualify for placing funds of the insurance companies as well.
If large funds flow into India following opening up the sector to higher foreign investment, the loss is not of India’s. After all, if someone chooses to bring in his money – and all money is hard earned, including money from overseas – the risk is for the one who is doing such deals. India is gaining in the process that such funds can supplement domestic availability of funds. If funds come into India from global insurance companies, these will not be spent for terrorist funding or for bringing down the Indian state. It should come in to earn some dividends at best. There is a common supposition in the country that if funds flow from overseas, these will invariably be for some nefarious activity in this country. This is nothing but a form of economic persecution mania. It is time we grow up.
Secondly, the world is not just waiting with bagful of money to pour into whatever is available in India. As a matter of fact, investors will have to be wooed to come and burn their money on Indian projects. China had most effectively done this after opening up and the results are for all to see. Today, China is in a position to dictate terms to the USA , it can lend its own money to Russia to lay pipelines for transportation of its gas and oil, the European Union comes to China’s doors to plead for funds to rescue its beleaguered debt-ridden countries and IMF looks upto to China to get supplementary assets.
It was not always so. China had to go out and present itself as a worthwhile destination for foreign investment. Even today, China is constantly at work to woo the large corporations of the developed world to come and invest, its ministers are constantly engaged with high officials of giant corporations to woo them into the country.
Funds flowing into India – and not going out – will always benefit. We have been watching the investment levels dropping in the country, as noted by none other than prime ministers’ Economic Advisory Council. Insurance companies coming into India will inevitably result in far greater competition in the insurance space and these will benefit no other than the common man. Large insurance investors are not just fly-by-night operators. They cannot salt away money from this country after coming in and investing in India. They would look forward to earning on their investment and that will mean sharing this with the government in the form of taxes.
On the other hand, in a fiercely competitive market, insurance companies – having foreign holding or not – will have to survive on the basis of its quality of service, the reliability of its performance and returns they give to their subscribers. If insurance products improve, will it not help the common man? You can argue that insurance is now subscribed by the rich and not poor. Are we looking forward to India’s poor ever remaining poor? Aren’t the poor getting a little better and eventually be able to buy insurance policies? Can we not devise insurance products for the poor?
One caveat: the policy for opening up the insurance sector has been denied to public sector insurers. The denial will work to their disadvantage. The capital appreciation that the public sector insurance giants could have been befitted. The private insurance companies and their existing owners will make a killing once the policy becomes operative. Their market capitalisation will catapult. But it will not happen to the much bigger public sector insurers by policy. What a shame.
This is happening because we are afraid of the market. We are artificially limiting the market for the public sector. [IPA]
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