Insurance Bill is a paradigm shift; LIC likely to struggle to keep up with rivals

The Narendra Modi government’s first major economic reform, the passage of the Insurance Amendment Bill, is seen as a boon for domestic private life insurers looking for foreign money. But the behemoth Life Insurance Corporation has enough reasons to be worried as it has seen a sharp erosion in its market share to its private sector peers firms over years. The market share of the company, which managed Rs 15.74 lakh crore of assets as of 31 March 2014, has declined fast ever since the sector was opened up by former finance minister Yashwant Sinha in 1999. As of 31 March 2014, the company enjoys about 75 percent market share, down from 100 percent in 1999. Now with the private insurers expected to get more aggressive, the deterioration is likely to get worse. For the uninitiated, the Insurance Amendment Bill, passed yesterday, has raised the foreign direct investment in the sector to 49 percent from the present 26 percent. The bill has also brought about various other changes to the Insurance Act, keeping the consumers in mind. [caption id=“attachment_2152517” align=“alignleft” width=“380”] ThinkStock[/caption] However, the notable change is the increase in the FDI limit. All private insurance companies, barring Bharti AXA and Future Generali, have reached the present 26 percent FDI cap and these companies are in urgent need of capital for further expansion. No wonder they are welcoming the development. Sandeep Patel, MD and CEO of Cigna TTK Health Insurance, has described it move as “a paradigm shift moment for the Indian insurance sector”. “The Insurance Amendment Bill will further support the development and enhancement of the health insurance industry with an infusion of capital and the ability to operate as a separate line of business,” he said. Cigna TTK Health Insurance is a 74:26 percent joint venture between the TTK group and Cigna, a US major. Munish Sharda, managing director & CEO, Future Generali Life Insurance, has termed the passage of the bill as “the first major economic reform in recent times”. He expects the bill to enable long-term development and also facilitate the reforms agenda and drive economic growth and long term funding to Indian infrastructure projects. Future Generali is a 25.5:74.5 percent JV between the Future group and Generali, an Italian group. “Our shareholders stand committed towards long term development and success of the life and general insurance businesses, and Generali will increase its stake in the JVs in line with the regulations and post discussions with the JV partners,” Sharda said in a statement. Monish Shah, senior director, Deloitte India, meanwhile, expects $2-4 billion to flow into the sector over the next two years. “The industry may also witness limited consolidation as the additional capital will provide leverage to the larger players to consider inorganic growth. Access to capital is likely to become a key differentiator for players,” Shah said. Clearly, capital drought of the private insurers will come to an end. And, as mentioned earlier, this is bad news for the state-run LIC for the following three reasons. For one, the company has a precarious solvency ratio. Solvency ratio is a ratio between an insurance company’s assets and its liabilities. It helps to understand how well the company is prepared to meet all its liabilities in a difficult situation. The Insurance Regulatory and Development Authority that regulates the sector in India has mandated that the insurance companies should have a solvency ratio of 1.5 percent. A look at the table below shows that LIC is the least healthy by this parameter with a ratio of 1.54 percent, which is closer to the IRDA-mandated threshold. It may have a large asset size, but its solvency ratio indicates it is financially weak. Secondly, huge cash reserves have proved to be a bane for the company as government after government has dipped into the kitty whenever in need of money. If the RBI is the lender of last resort, LIC is the first resort. The latest instance is the Narendra Modi government’s decision to push it to invest a whopping Rs 1.5 lakh crore in Indian Railways over the next five years. The company has been there whenever the government wanted help in the stock market. Had LIC been not there, the very few divestments and offers for sale the UPA government did would have been resounding flops. So also the offer for sale of Coal India under the Modi government. It will continue to lend helping hand for the government whenever required. Thirdly, there is no transparency. “Who knows what all investments have they made? How do we come to know about them? All those are the common man’s hard earned money,” says a seasoned investor. To be sure, the equity investments the company made over the last few years might have been paid off now, given the boom in the stock market. But that doesn’t mean it will remain so for ever. There is only one solution for all these problems: LIC should be allowed to function on its own - take investment decisions on its own. Prime minister Narendra Modi has more than once declared that the government has no business to be in business. If he walks this talk, he should free LIC. Other wise, as the investor quoted above said, competition from the private players will expose LIC’s weaknesses. Data compiled by Kishor Kadam