Certainly, not the common man, unless it is accompanied by stringent regulations to protect the “aam aadmi” from exploitation

The central government has proposed to enhance foreign direct investment (FDI) in insurance to 49% in its second wave of reforms announced recently. At present foreign investment in private insurance companies is restricted to 26% of their capital, which is now proposed to be increased to 49% by passing an amendment to the Insurance Act in the ensuing session of Parliament.
 

Announcing this decision, finance minister P Chidambaram said “the benefits of this amendment to the insurance act will go to the private sector insurance companies, which require huge amounts of capital and that capital will be facilitated with the increase in foreign investment to 49%.”  He also clarified that this will not apply to public sector insurers like Life Insurance Corporation of India (LIC) and the five general insurance companies.
 

At present there are 44 private insurance companies authorized by the Insurance Regulatory and Development Authority (IRDA) operating in the country. These comprise of 23 life insurance, 17 general insurance and four health insurance companies, since the insurance sector was opened for private sector in the year 2000. These are all joint ventures between the Indian promoters who hold up to 76% and foreign insurance companies who hold up to 26% as mandated by the law.
 

The insurance business requires additional capital as it grows and this has to come from the promoters. If the Indian promoters are unable to contribute their share of the capital, they will not be able to grow. Foreign companies with deep pockets will be able to fill this gap, if they are allowed to invest up to 49% of the capital. It is estimated that the private insurers need about Rs60,000 crore of additional capital during the next five years. Therefore, the raising of FDI cap to 49% will come handy for the foreign partner to increase their stake in the company, without the local partner having to put matching capital in to the company. The foreign partner will be more than happy to increase its stake, as it will help it get a bigger share of the pie, and will also give it a larger role in running the company according to its ways, by virtue of a higher shareholding in the company. This will, therefore, be a boon to the foreign insurers to come to India in a big way.
 

Does this benefit the common man?
 

This change does not benefit the common man, as he is the target for all insurance companies, whether Indian or foreign, who try to extract maximum business from the gullible public, who are carried away by the sweet talk and tall promises made by the insurance salesmen. In fact they are concerned more about their own commission rather than the welfare of the insured. Insurance business is one where there is rampant mis-selling and the insurance companies go scot free because of a number of conditions included in the policy in small print, but never communicated in advance.
 

Our country has a low insurance density and every company selling the insurance feels that there is abundant scope to expand its operations and hence this proposal to increase FDI in insurance has been received with great applause by the industry. Only time alone will tell whether this irrational exuberance is justified considering the fact that there is political opposition to this move and this change requires approval of the Parliament.
 

If and when this proposal becomes a law there is bound to be a great demand from foreign companies to enter our country because of the abundant opportunity provided by the large population and the growing per capita income of our people. During the last twelve years, if over 40 foreign companies have entered our country as joint venture partners, with the increased FDI cap, we may expect another 100 companies to come within the next twelve years. Unfortunately, some of our people are carried away by the foreign names and brands, and that there is a perception among our people that foreign companies are better than the home-grown companies. But the fact is that foreign companies are as bad as or as good as local companies, and insurance business, whether run by Indians or by foreigners has the same objective, as in all business, of maximizing returns to the owners even at the cost of the insured.
 

How to protect “aam aadmi” from exploitation by the insurance companies?  
                

It is abundantly clear that mere hiking the FDI cap to 49% does not in any way benefit the common man, unless it is accompanied by stringent regulations to protect the “aam aadmi” from exploitation.  
 

 (The author is a financial analyst and writes for Moneylife under the pen-name ‘Gurpur’)