FDI in Insurance? Why not IDI?
by Koutilya Sastri on 19 Jul 2014 2 Comments

As a young college student I used to read Dale Carnegie. In one of his books he says, “Insurance is a bet on your life. You say you will die. The insurance company says you will not. The premium you pay is the bet amount.” Not much has changed since then about insurance. The companies use the same strategies and the people approach them with the same fear.


A decade back, I asked an LIC employee how life insurance companies make money. He looked up at me and remarked in a surprised manner, “you are one of the few people who have asked this question. Tell me, what you do with the life insurance policies”.


I did not understand. “What do you mean? With the policies or my relationship with the company?”


My friend smiled. “I mean everything. What do you do with insurance?”


“After I signed up for a policy, I pay the premiums on time. That is all.” I said.


My friend's mouth widened into a grin, “What about others?”


“Are you teasing me?” I protested. “Probably everyone on this planet are doing pretty the same as me.”


“Then you already know what we in the insurance industry are doing.” I stared at him, “What do you mean?”


“If you customers continue to pay, what we will be doing in the insurance company?” His look was mischievous.


I groped for a few seconds and then said “You mean simply collecting the amounts, then?”


My friend came closer and said, “Congratulations. You are now one of the handful who have cracked the insurance working code”


I was still unclear. “Do you mean to say you do no other thing? You need to pay the claims and you need to settle the maturity amount”.


“Easy, easy, dear. The period of a policy is usually eternity in money circles. It is raw money which simply accumulates with insurance companies. The companies pay a return of between six to eight percent in simple interest to the person at the end of the policy. The payable amount is usually earned by the company on your investment. Rest all is theirs.”


“Then the claims?” Now I was not sure whether this would pin him down.


My friend now assumed a serious face and shot back. “You be my teacher now. Tell me how many accidents or sudden deaths occur out of the total number of insurers in a year?”


I remained silent for a whole moment. The answer was clear. My friend now spoke for me “yes, we are simply collecting agencies”.


In the intervening period, the insurance industry has grown very big in India. There are so many big names. My favourite has always been LIC. That it has survived ten years of UPA onslaught itself is a big tribute.  I have a low trust level for others.


Now for this 2014 budget. Mr Jaitley said that he is going to allow Foreign Direct Investment (FDI) in this sector. I called up my friend again. “Saw the news?” I asked.


“Good for the foreign firms. Bad for the country and investors,” he was real sober now.


“Really? How?”


“Imagine you are the Finance minister. In which sectors will you invite FDI?”


“If we need investment in a sector, it must be either fund starved or technically weak. Now I am talking of the big scenario. If I were the Finance Minister, I would invite FDI in Aircraft manufacture, Solar energy, wind energy, fuel cells, safe nuclear energy, telecommunication equipment, shipping etc”


“Why not in banking or Insurance?: he pressed.


“Because we are not lacking in these fields. Further, these fields do not need any technology. The only thing is proper administration. We are as efficient as others.”


“Now tell me why we do need FDI in these sectors? Insurance fund is simply profit. The companies pay the insured person the returns on the profit. Look at how big LIC has grown. The collection of money with them is huge. The FDI talk is merely for the control over this money. The person with control can do anything”, my friend said, seeking to conclude.


“You mean this money will be taken out of the country?”


“It is the biggest fear of all concerned people in the domestic Insurance Industry and investors”.


“But the Finance Minister may justify we also need money for these sectors,” I pointed out.


“Then the money can come from domestic market itself. Ask your Minister to release an advertisement for bonds at 9% per annum for the insurance industry and the issue will be oversubscribed hundreds of times.”


“Do you mean Indian Direct Investment”? I asked, satisfied I had coined a new phrase for posterity.


“Exactly,” he said, hanging up. 

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