No FDI hike, reforms in insurance sector

Faced with stiff opposition from the Left parties, the UPA government failed to hike FDI cap in insurance and push forward pension reforms in 2005, but it did not prevent private players from increasing their market share and state-owned LIC going in for global expansion.

The year 2005 taught a cruel lesson to the Indian populace for not having adequate insurance covers against vagaries of nature, as it was seen after devastating Tsunami, flash floods in western India and the earthquake in Jammu & Kashmir.

Though state-owned insurers rose to the occasion in settling claims that came after the devastations, these events once again revealed the low insurance penetration in India and the need for further reforms.

Cut-throat competition and need for additional capital infusion forced the insurance industry and regulator IRDA to pitch in for hike in FDI cap from 26 to 49 per cent in the sector.

Though, it was promised by Finance Minister P Chidambaram in the Budget, the government could not muster up support from Left parties to amend the IRDA Act for raising the FDI cap and neither could it come up with a comprehensive bill to make the Indian insurance laws in-sync with global standards.

Voicing the concerns of foreign investors, US Ambassador David Mulford charged the government for "breach of faith" to foreign investors by not hiking FDI cap in insurance from 26 to 49 per cent.

Left parties also played spoilsport to UPA's efforts at pushing forward pension reforms through the PFRDA bill that mandates 26 per cent FDI for private pension fund managers and promises higher returns for elders.

While domestic financial majors like SBI, LIC and UTI AMC are eyeing entry into the long-term savings business, foreign financial powerhouses like HSBC, Prudential, Aviva, Standard Life, ING, New York Life, Principal Financial, Merrill Lynch and Templeton are also making a bee-line.

PFRDA has an open mind in allowing as many players who meet a set of stringent criteria, its chairman D Swarup told PTI after assuming office. Despite the preparedness from the regulator and private players, PFRDA Bill failed to get Parliamentary nod this year.

When the bill was introduced in Parliament early this fiscal, it was referred to the Standing Committee on Finance, which proposed some modification including a risk-free scheme that would invest subscribers' money in government papers.

The revised bill could not be taken up in Parliament in winter session much to the dismay of the Centre and states who are eagerly waiting to switch over to a defined contribution system from the present defined benefit pension system to reduce their pension burden now at over 1 per cent of GDP.

As many as 15 states have enrolled in the new pension system which could invest upto 80 per cent in equity and promise a higher return over a long term.

Both insurance and pension reforms are essential for the country to increase its savings and channelise long term funds to infrastructure sector, which in turn would help the economy to grow faster.

While the UPA failed to open up the pension sector, the insurance sector witnessed entry of new players like Sahara, Shriram Sanlam, Bharti AXA and Anil Ambani's ADAE group.

ADAE group company Reliance Capital took over AMP Sanmar Life, which was put on the blocks after the Australian partner AMP decided to quit the venture.

The Anil Ambani controlled Reliance Capital acquired AMP Sanmar for about Rs 100 crore (Rs 1 billion) after a competitive bidding from other heavy-weights.

In 2005, private insurers put up tough competition to state-owned insurers and increased their market share to over 26 per cent in both life and general insurance space.

In life insurance segment, private players like ICICI Prudential, Bajaj Allianz, HDFC Standard Life, Birla Sunlife, Tata AIG, SBI Life, Aviva and Max New York Life improved their market share in 2005.

The insurers brought about a sea change in the attitude of the masses, who now see insurance as long term savings and investment instruments rather than being a mere tax-saving one.

The competition from private players forced LIC to become more innovative and pro-active. Not surprising, LIC geared up to an aggressive marketing stint and launched a slew of products like 'Bima Gold' in its Golden Jubilee year to arrest the fall in its market share.

LIC targets 50 per cent growth in premium from new businesses at about Rs 18,000 crore (Rs 180 billion) and an overall premium income of over Rs 1,00,000 crore (Rs 1000 billion) this fiscal, its chairman A K Shukla said.

India's largest insurer also ventured in a major global expansion drive. LIC will soon finalise joint ventures in Saudi Arabia, Mauritius and Nigeria and test the waters to enter New Zealand and Egypt.

LIC, which already has operations in UK, Sri Lanka, Fiji, Nepal, and Mauritius, has plans to expand in other markets as well, Shukla said. The insurance monolith also announced plans to enter the health insurance sector, which is dominated by other general insurers.

To fuel up growth in life sector, IRDA came out with the much-awaited guidelines on Unit Linked Life Insurance Plans, which mandates a lock-in period, minimum insurance cover and allows only partial withdrawal of money.

The guidelines aim to ensure greater transparency and understanding of these products to the insured, since the investment risk is borne by the policyholders.

In non-life insurance space, the private players led by ICICI Lombard, Bajaj Allianz and Iffco-Tokio are steadily increasing their market share by 7 per cent to 26.5 per cent in 2005 and gave a tough challenge to PSUs - New India, Oriental Insurance, National Insurance and United India.

Amid stiff competition, the 12 insurers collected Rs 11,904 crore (Rs 119.04 billion) till October 2005 compared to Rs 10,266 crore (Rs 102.66 billion) a year ago despite the fall in the business of National Insurance and Reliance General.

Market leader New India with 23.11 per cent market share grew by 12 per cent, while Oriental Insurance expanded by 13 per cent to dislodge National Insurance from second spot.

National Insurance saw fall in business as its premium income was down by seven per cent in the first seven months of this fiscal while United India grew business by 4.43 per cent.

While competition heated up, some of the intermediaries like brokers and training institutes resorted to unfair means, prompting IRDA to crack the whip on them.

With insurers still concentrated in cities, government announced micro-insurance regulations this year and allowed life and non-life players to offer combined policies that will cover risks to lives, crop, huts, livestock and tools at an affordable cost.