Page 110 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 8: Insurance Sector

areas, such as the health insurance sector. And the fourth is to emphasis self-regulation with Notes
capital adequacy over structural regulation of the sector.
It is believed by all the industry specialists that the increase in FDI would help customers with
better products, more options and better service levels from the insurance players in the industry.
The minimum investment limit for health insurance companies is proposed to be fixed at
50 crores. At present, the companies entering the insurance business — life or general
insurance — are required to have a minimum paid-up capital of 100 crores.
The move to lower the investment limit is expected to encourage companies with less capital to
launch health insurance business and increase the penetration of this important segment.
In the case of the general insurance sector, besides raising the FDI cap from 26 to 49 per cent, the
relevant bill allows the four state-owned general insurance companies — Oriental Insurance
Company, New India Assurance, United India Insurance and National Insurance Company — to
tap capital markets for funds after obtaining permission from the government. The bill also
allows insurance companies to raise newer capital through newer instruments on the pattern of
banks.
Moreover, in a move widely seen as aimed at helping Lloyds of London in the first instance, the
bill seeks to allow foreign re-insurance companies to open offices and conduct business in the
country with a minimum capital of 200 crores. Thus far, only the General Insurance Corporation
could provide reinsurance in India. In addition, to make entry into the rapidly expanding health
insurance market easier for private players, the bill proposes to reduce minimum investment
limit for health insurance companies from 100 crores to 50 crores. Also, the bill seeks to do
away with the requirement that promoters have to divest specified part of their equity after ten
years, allowing promoters to retain control of these corporations. Finally, as part of the new
regulatory framework, a Life Insurance Council and General Insurance Council are to be set up
as self-regulating bodies.
While these are major changes, the big story is what this government or any version of it that
may come to power after the next election has in store for the Life Insurance Corporation. The
Life Insurance Corporation Amendment Bill is presented as an innocent piece of legislation
aimed at increasing the capital base of LIC, to bring it on par with private insurers. The problem
arises when this is read along with the changes being pushed through in the general insurance
sector. The government plans to allow government-owned insurance companies to mobilize
money from the capital market, allowing for a dilution of the government's shareholding. And
this comes along with the decision to raise the cap on foreign direct investment in the insurance
sector from 26 per cent to 49 per cent. If in time, these provisions are extended to cover the LIC,
the government would recapitalize LIC not with its own money but with money mobilized
from the market and from foreign investors.
This fear stems from the implicit effort to homogenize the insurance sector, bringing the LIC on
par with the private sector. This does signify a move to accelerate the shift in the form of
regulation away from direct control through public ownership of institutions in the life and
general insurance sectors to self-regulation based on IRDA norms and guidelines and capital
adequacy requirements. The use of capital adequacy is reflected in the provision in the bill to cap
the sovereign guarantee provided to those insured by the LIC and replacing it with a provision
that a part of the surplus-which is the excess of assets over liabilities actuarially calculated-must
be treated as a solvency margin and placed in a reserve fund, which the corporation can access in
times of need. As of now, 95 per cent of these surpluses are distributed to policy holders as
bonuses and the rest is transferred to the government as dividend against its 5 crores investment.
The bill provides for the transfer to policyholders to be capped anywhere between 90 and 95 per
cent, with the balance divided between the government and the reserve fund. Thus, state control
and state guarantee are to be replaced with self regulation, capital adequacy and solvency
margins. This is clearly a sign of long-term intentions.

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