FDI in Insurance ? Why not IDI ?

FDI in Insurance ?    Why not IDI ?

As a young college student I used to read Dale Carnegie. In one of his books he said this  "" Insurance is a bet on your life. You say you will die. The insurance company says you will not."". 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 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 now. " 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 do in the  insurance company ?" His look was mischievous.

I groped for a few seconds and then said " You are simply collecting, 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 an 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. 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 simple 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. Jaitley said that he is going to allow FDI - Foreign Direct Investment 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" My friend 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 FM, I will invite FDI in Aircraft manufacture, Solar energy, wind energy, fuel cells, safe nuclear energy, telecommunication equipment, shipping etc"

" Why not in banking or Insurance ? " My friend pressed further.

" 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 cal do anything. " My friend said, seeking to conclude.

"You mean this money wil ne taken out of the country ? "

" It is the biggest fear of all concerned people in the domestic Insurance Industry"

 "But the FM may justify we also need money for these sectors." I pointed out.

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

" Do you mean Indian Direct Investment" ? I now was satisfied I had coined a new phrase for posterity.

" Exactly."  My frinend hung up.

THE SENSEX HAS HIT A HIGH. WHAT DO I DO NOW ?

The sensex has hit a high, a record high this time. Many a person who had invested in it long back will be full of smiles and goes to town with his story and how smart he was. His family, kith and kin , friends and society are in awe of him and want to emulate his success.

Predictably, many people enter stock market. These people bring small sums and buy popular stocks at a already high price. The demand drives these stocks further higher. Many a financial institution or mutual fund advisor will tell all to hold to their stocks as the long term prospect is rosier.

And then an unpredictable thing happens. The market crashes. Crashes unbelievably losing several thousand points in a single day. The entire money invested by the new investors goes into thin air.The prime minister will say he will look into the causes, the Finance minister gives many reasons in a language and style that  no one can understand a thing . Industry leaders and financial institutions aver that the economy is sound and no cause is there for an alarm. The lay investor is left wounded and betrayed, and vows never to return to the stock trade. They sell off whatever stock they have for a pittance and quit.

Many a family is left devastated as their life saving has evaporated right in front of their eyes. The share market limps back to some normalcy. Many financial institutions mow start buying and the sensex raises slowly. In a year it manages to establish a stable graph without any fluctuations. Now it is three years and the sensex sees good activity. The stock markets are booming. The economic condition was the same as the last crash but, the mutual funds buy stocks like crazy saying it is the safest investment. The share prices rise phenominally and some small and sundry investors who held onto their shares despite losses gain handsomely.

These people go to town selling their 'success story'. These stories are picked up by the business and financial magazines for a front page news and, a new trend starts emerging. People regain their confidence in their stock market and start buying in trickles. This then becomes a large stream flooding the stock market. This is the money saved by a school teacher, a house maid, a bank clerk and a bus driver. Some people buy stocks directly. There are many other gullible people who are afraid of stocks . They think they are smart and end up buying   things like mutual funds, equity based insurance, tax free deposit scheme. They never imagined that they have the same vulnerability as stocks.

No one is in doubt as the market zooms. The mutual funds recruit more MBA s and send them into the market to sell their financial products. The stocks are rising further. No one has noticed the fact that in the last three years no new venture has started , or that the housing sector is in doldrums due to lack of new customers, or the fact that the IT sector is retrenching their employees in thousands, or the fact that the placements in campus interviews are slipping to a new low. The new investors have not even noticed that the Auto majors are in severe shock following a slump in sales. Who will know that most of their so called sales are simply despatches to their dealers ?

A innocent person who got a new employment as a financial advisor (since he sells mutual funds), even prints pamphlets at his own costs to show how even a few thousands now in his mutual funds will grow thousand fold in twenty years. His competetors want to do one step better and their agents print their own version of success and send them through morning newspapers, emails and websites.

Now the market is on a crescendo attracting many new sectors of investors. Stocks of unheard of companies are at a record high. The stock lanb is ripe enough for a feast.

And then an unexpected crash happens. The financial institututions suddenly 'book profit'. Not one company but a whole herd of them sell in a single day taking all the profits along. The whole stock market is devastated. The saving of millions of innocent Indians vaporizes. But this is news for only a few weeks as the newspapers and channels look for more spicy and hotter political and cine subjects to entertain the masses.

See a familiar trend ? The next cycle of climb and crash may be timed after three or four years. A new generation of people will be targeted this time too.

But, you may be asking me , how to buck this trend ? At the same time , you may ask "how to earn good returns on my money ?"

Consider these points.

1. When is the best time for entering the stock market and buying the stocks?

It is the same time as the instituitional thieves enter it. Right after a crash. The stocks will be the lowest then. Try this you will never be beaten.

2. When is the apt tiime  to sell my shares ?

Again when the thieves are preparing to sell. Just as the market is soaring, time your stocks and sell. Always sell at the peak.

3. I hate stock market and mutual funds as I have been betrayed by them. What I should do ?

Take any share at an average of eight years. Compare its price then and now. In the same period, a fixed deposit would have doubled. It has full liquidity, zero fear, and maximum safety. Only gold matches its safety and liquidity.

4. How do I invest in trickles and still save and earn ?

Always patronize Recurring deposit schemes of banks. Invest for one year and on maturity convert the proceeds to Fixed Deposit. Now, one can do all this online also at your leisure time. If you start saving Rs 500 per month for the  years 25 to 45. Your return at the time of your retirement will touch a crore rupees ! Is it not attractive ? Besides, it is the safest investment. You do not steal another's money as in stock trade. All the money invested by you is being used to loan to industries contributing to long term growth of the economy.

5. What do you say of the Stock trade ?

It is a sickening one. Quit it like poison.

Venkatasubramanian J