Portents of insurance amendments


The Life Insurance Corporation (Amendment) Bill, 2008, being tabled in Parliament proposes primarily to raise the minimum capital from Rs. 5 crore to Rs. 100 crore, with a provision for further enhancement. The real intention behind this proposal needs to be examined contextually. The general apprehension is that the motive might be the implementation later of the R.N. Malhotra Committee report, constituted in 1993, recommending reduction of the government stake in the ins urance companies to 50 per cent through disinvestment. Obviously, Rs. 5 crore is too paltry a sum to be disinvested. Also what could be the earthily rationale of increasing by a trifling Rs. 95 crore the capital of an institution with assets of Rs. 1,17,204 crore as of fiscal 2007-08?

This is a portent of a comprehensive legislation proposing amendments to insurance laws — the Insurance Regulatory and Development Authority (IRDA) Act, the General Insurance Business Nationalisation Act (GIBNA) and the Insurance Act 1938. As one of the foremost philosophers of our time and Professor Emeritus at the University of Sussex, István Mészáros percipiently observed in the face of the prevailing global meltdown: "…the real foundation of our perilous banking and insurance system which operates on the ground of self-serving confidence tricks that sooner or later are bound to be [and from time to time actually have been] found out."

The government is once again capitulating to the incessant demands for foreign capital. This accounts for its going ahead with increasing foreign direct investment from 29 to 49 per cent. Here it is pertinent to mention that since 1999, when our insurance sector was first opened up for private participation through the IRDA Act, the manna of foreign investment in infrastructure is yet to descend. The governmental assumption then was that premium global funds would be pumped into our country. Now there are 12 private life insurers and nine general insurance companies. The brutal truth is foreign funds that have trickled in through these are only to the extent of their share capital to run business operations in India.

Conversely, LIC with Rs. 6,50,000 crore in investible financial assets has the attraction of the goose that lays the golden eggs. One can imagine insurance majors, having burnt their fingers in the global arena, itching to gain control over this bounty with a relatively small investment. LIC, which for decades has been providing the oxygen of cheap long-term capital for investment in infrastructure and social development — in other words, our nation-building mission — should not be allowed to fall prey to purely mercenary capital.

Two aspects are worth noting here. One is the observation of the World Bank-supported ‘Commission on Growth and Development’ headed by Michael Spence, co-Nobel laureate with Joseph Stiglitz: "Our view is that foreign saving is an imperfect substitute for domestic saving, including public saving to finance the investment a booming economy requires." In lay terms it means that national interests and foreign corporate interests are incompatible.

Equally noteworthy is the indisputable fact that Foreign Institutional Investors have withdrawn Rs. 1,00,000 crore from the equity market this calendar year till now. This is as per provisional data provided by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). What is the guarantee that foreign players will uphold our interests above their own, when it comes to a financial crunch?

Another equally disastrous move is the amendment to the GIBNA, aimed at allowing the four public sector general insurance companies to disinvest their shares and raise resources from the market. This step to meet capital requirements is based on the specious premise that the government is not in a position to provide them. Hence the Initial Public Offering route is touted as the best option. In effect, it will pave the way for privatisation of a fundamentally strong public sector as the following figures testify.

With a total capital of Rs. 450 crore, all the four companies are adequately capitalised and have adequate provisions to meet the requirements of solvency margins. Their combined profit in 2007-08 was Rs. 2,794 crore and they paid Rs. 449.49 crore as dividend to the government. Their combined investment in the Indian economy is Rs. 62,922 crore, and they maintain reserves and surplus of Rs.13,253.51 crore. Their asset worth is Rs. 79,198.47 crore. Any move to sound the privatisation horn of such a sector would be deleterious to both our economy and national interests.

Recipe for disaster

Another retrograde amendment sought in the Insurance Act is to relax the stipulation that insurance funds be invested only in government securities and approved investments. Movement of these outside the country is expressly prohibited. Bowing to private demands, these funds may even been allowed to be parked offshore. In the prevailing volatile global share and stock market scenario it would be a sure recipe for disaster, since we would be voluntarily linking ourselves to the speculative bubble of casino capitalism. Shii Kazuo provides an insight into this bizarre unreality in the October 2008 issue of Japan Press Weekly: "How much speculative money is moving around the world? According to a Mitsubishi UFJ Securities analysis, the size of the global ‘real economy,’ in which goods and services are produced and traded, is estimated at $48.1 trillion… On the other hand, the size of the global ‘financial economy,’ the total amount of stocks, securities and deposits, adds up to $151.8 trillion. The financial economy thus has swollen to more than three times the size of the real economy, growing especially rapidly during the past two decades."

Some caveats need to be entered here, in the clamour to attract foreign capital and especially in the wake of the collapse of American International Group, the world’s largest insurer. The sub-prime crisis has devastated foreign insurance players. MetLife, New York Life, U.K. Prudential, Aviva, Fortis, ING, and Allianz are undergoing turmoil in their countries of origin. Yet our confidence in their purported expertise seems unshaken! How else can one explain the efforts to allow Lloyd’s of London to enter the reinsurance market, so far the exclusive domain of the General Insurance Corporation of India? It is worth remembering that Lloyds was left financially hamstrung by the payment of £7bn it made for Scottish Widows in 1999. Let us also not forget that in the period from 1988 to 1992, it was rocked by losses amounting to $14.09 billion, which led to an article in The Wall Street Journal questioning "the ability of Lloyd’s to continue as an ongoing force in the marketplace." Shouldn’t we question the wisdom — or rather the lack of it — that can envisage lending hospitality to a company with such a track record?

Human factor

The human factor never seems to count with the apologists for the neo-liberal framework. Thus, to them, the privations the policy shift of such magnitude can bring about to 1.75 lakh employees and officers of the LIC and four public sector general insurance companies might appear trivial. They might also conveniently discount the negative outlook accorded to the insurance industry in the U.S., Europe and Japan for the next 18-24 months by rating agencies like Fitch and Goldman Sachs. But our society at large should protest such amendments that show utter disdain for employee sentiment and also so cavalierly treat our national interests by allowing the entry of foreign capital.

(The writer is a Member of Parliament.)

 

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