Firewalls needed between banks and insurance firms: Survey

The Economic Survey tabled in parliament Thursday voiced concern about the growing linkages between the banking and insurance sectors and said firewalls should be built between the two to prevent any financial contagion from one to the other in time of stress.

Many Indian banks have floated life and non-life insurance companies. Some are also buying into insurance companies which are part of financial conglomerates.

“Any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer. Efforts therefore have to be made towards building firewalls to prevent contagion from one sector to another, especially in times of stress,” said the survey.

The finance ministry in a recent letter to banks that get capital support from the government has also cautioned the lenders against putting money in non-core business.

The ministry said public sector banks should not to invest their core capital in any joint ventures, funds, subsidiaries which is not a core banking activity without prior approval from the government of India.

“The Indian insurance sector is well capitalised but significantly exposed to the banking system. Inter-linkages between the insurance and banking sectors are a matter of concern, with many insurance companies being part of financial conglomerates,” said the survey.

“Any financial stability issue regarding banks in the conglomerate may have an amplifying effect on the insurer.”

Internationally, the insurance and pension segments, in view of their typically long-term- long only investment style, are believed to contribute to financial stability.

The ability to raise capital and adequate reinsurance capacity are expected to be important determinants for the insurance sector’s continued stability, the survey said.

Referring to the pension sector, the survey stressed on sector reforms as it will “not only facilitate the flow of long-term savings for development but also help establish a credible and sustainable social security system in the country.

“Lower levels of financial literacy, particularly among workers in unorganized sector, non-availability of even moderate surplus, and lukewarm response so far from most of the state/UT (union territory) governments to a co-contributory Swavalamban Scheme are the major challenges to universal inclusion of poorer sections of Indian society into the pension network,” the survey said.

According to the survey, Indian life insurers underwrote new business of Rs.1,26,381 crore during financial year 2010-11 as against Rs. 1,09,894 crore during the year 2009-10, recording a growth of 15 percent.

“Of the new business premium underwritten, LIC (Life Insurance Corporation of India) accounted for Rs. 87012.35 crore (68.9 percent market share) and private insurers accounted for Rs. 39,368.65 crore (31.1 percent market share). The market share of these insurers were 65.1 percent and 34.9 percent respectively in the corresponding period of 2009-10.”

Expressing satisfaction at the growth of non-life insurance sector, the survey said the industry underwrote a premium of Rs.42,576 crore during 2010-11 up from Rs.34,620 crore in 2009-10.

“The growth was satisfactory, particularly in view of the across the broad cuts in the tariff rates.”

Last fiscal the private insurers underwrote premium of Rs. 17,424.6 crore as against Rs.13,977 crore in 2009-10.

On the other hand the government owned insurers underwrote a premium of Rs.25,151.8 crore in 2010-11 as against
Rs.20,643.5 crore in 2009-10, logging a growth of 21.8 percent as against 14.5 percent in 2009-10.