With the cabinet approving amendments to the Insurance Act of 1938, to raise the cap on foreign direct investment (FDI) in insurance companies from 49 to 74 per cent, the process of implementing the next stage of reducing public control over Indian insurance has begun. Once legislated and implemented, the proposed increase in the FDI cap would permit foreign control over a majority of insurance companies operating in the country.
Possibly to appease those among its constituents, such as some members of the Swadeshi Jagran Manch, who still espouse a version of economic nationalism, the Finance Minister promised domestic private oversight over the foreign controlled entities. By way of safeguards, the Budget speech promised to require a governance structure in which “the majority of Directors on the Board and key management persons would be resident Indians, with at least 50 per cent of Directors being Independent Directors” and a financial rule by which an as yet unspecified percentage of profits will be retained as general reserve.
Parallel to the process of inducting foreign capital into insurance, the Budget for 2021-22 also announced a decision to privatise (at least) one general insurance company and enact legislative amendments permitting an initial public offer of equity by the venerable Life Insurance Corporation of India. Many see in the latter the first steps to push for a privatisation of LIC as well.
The Finance Minister’s decision to use the term privatisation as opposed to disinvestment when referring to equity sale in general insurance does point to a qualitative transformation in perspective. The term disinvestment had associated with it two features. The first was post sale of equity in a public owned entity, majority ownership was to remain with the government. The second was that after the sale of equity, control over operations would remain with the government. The case for equity sale of this kind included the argument that the presence of minority private owners would introduce an element of external oversight to discipline both the government (the majority owner) and the management of the entity. That has been discarded and equity sale is now being seen as a means of mobilising “non-debt creating capital receipts” that could finance routine budgetary expenditures without adding to the fiscal deficit. Very clearly now the government has decided to sell insurance firms lock, stock and barrel partly to appease corporate interests looking for opportunities for profit in finance, but mainly to mobilise resources to finance budgetary expenditures.
As of now, besides the Life Insurance Corporation, there are 23 life insurance companies in India, and 4 publicly owned and 30 private general insurance companies. With the government having permitted foreign investment in insurance as part of the liberalisation process, a majority of these companies include a foreign partner. The new policy, which will encourage these partners to push for a hike in their share in equity, is therefore likely to result in foreign dominance over the insurance sector in India, initially in terms of number of companies, but possibly soon in terms of share in business.
The growing privatisation of the business has also been accompanied by a 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, for example, in the proposed provision that a part of an insurer’s surplus—which is the excess of assets over liabilities actuarially calculated—must be treated as a solvency margin and placed in a reserve fund the firm can access in times of need.
There is no reason to expect that this minor “safeguard” would protect citizens investing in insurance. There is much evidence on the adverse consequences of private dominance in the insurance sector. The insurance industry delivers “products” that are promises to pay, in the form of contracts that help lessen the incidence of uncertainty in various spheres. The insured pays to fully or partially insulate herself from risks such as an accident, fire, theft or sickness or provide for dependents in case of death. In theory, to enter such a contract the insured needs information regarding the operations of the insurer to whom she pays in advance large sums in the form of premia, in lieu of a promise that the latter would meet in full or part the costs of some future event, the occurrence of which is uncertain. These funds are deployed by the insurer in investments being undertaken by agents about whose competence and reliability the policy holder makes a judgment based on the information she has. The viability of those projects and the returns yielded from them determine the ability of the insurer to meet the relevant promise. To the extent that the different kinds of information required are imperfectly available the whole business is characterised by a high degree of risk.
That risk is multipled when multiple private insurers compete with each other. In an effort to drum up more business and earn higher profits, insurance companies could underprice their insurance contracts, be cavalier with regard to the information they seek about policy holders and be adventurous when investing their funds by deploying them in high-risk, but high-return ventures. Not surprisingly, countries where competition is rife in the insurance industry, such as the US, have been characterised by a large number of failures. As far back as 1990 a Subcommittee of the US House of Representatives noted in a report on insurance company insolvencies revealingly titled “Failed Promises”, that a spate of failures, including those of some leading companies, was accompanied by evidence of “rapid expansion, overreliance on managing general agents, extensive and complex reinsurance arrangements, excessive underpricing, reserve problems, false reports, reckless management, gross incompetence, fraudulent activity, greed and self-dealing.” The committee argued that “the driving force (of such ‘deplorable’ management practices) was quick profits in the short run, with no apparent concern for the long-term well-being of the company, its policyholders, its employees, its reinsurers, or the public.”
That things have remained the same was revealed by the failure and $180 billion bail-out of global insurance major American International Group (AIG) in September 2008. AIG was the world’s biggest insurer when assessed in terms of market capitalisation. It failed because of huge marked-to-market losses in its financial products division, which wrote insurance on fixed-income securities held by banks. But these were not straightforward insurance deals based on due diligence that offered protection against potential losses. It was a form of investment that in search of high returns allowed banks to circumvent regulation and accumulate risky assets. Former Federal Reserve Chairman Ben Bernanke reportedly declared that AIG took risks with unregulated products like a hedge fund while using cash from people’s insurance policies. When a lot of its assets turned worthless AIG could not be let go, because that would have systemic implications. It had to be bailed out.
The US House of Representatives report quoted above makes clear that foreign insurance firms are by no means uniformly characterised by good management practices. In addition, it should be obvious that these firms would be keen on deploying their funds in projects that are “reliable” (read, run by known multinational players), that offer maximum returns (which rules out infrastructural investments) and promise quick yields (which long gestation periods foreclose). That is, not only does foreign entry into the insurance business bring with it the problems associated with excess competition in the financial sector, but it does so through agents whose investment priorities could have little in common with a national agenda.
Thus, privatisation is likely to result in private losses in the form of increased risk and social losses in the form of the inability of the state as a representative of social interest to direct investments by the insurance industry. LIC, for example, has put at the Government’s disposal large volumes of capital for investment. Further, if insolvencies become the order of the day, there could be private losses as well as social losses because of the state being forced to bailout firms as the “insurer of last resort”. The risks of private ownership and the advantages of public ownership make inducting foreign investment into and privatising insurance a completely irrational policy.
(C. P. Chandrasekhar is currently Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi.)
❈ ❈ ❈
[Editorial addition:
In her budget speech 2021, the finance minister announced that one general insurance company will be privatised and LIC will be listed on the bourses in the financial year 2021-22. These are all steps towards the eventual privatisation of the entire public sector insurance sector. It is going to spell disaster for the common people, as private insurance companies are infamous for swindling policy holders.
Here is a brief summary of the excellent performance of India’s public sector insurance companies, which are rated as among the best in the world, and the consequences of their privatisation. These are extracted from a pamphlet written by us against Insurance sector privatisation in 2014.]
Insurance Penetration
Insurance penetration is defined as the ratio of total premium income to the gross domestic product (GDP) of the country. The insurance penetration in India at 4.4% is actually higher than the global average of 4 per cent! In fact, it is also higher than the United States and Germany. This is all the more remarkable, considering the low income levels in India. The reason for this outstanding performance: the public sector insurance companies have strenously tried to expand their operations in the rural and semi-urban areas and provide insurance cover to millions of low-income households.
Investing Premiums for National Development
Ever since the nationalisation of insurance sector, the public sector insurance companies have contributed huge amounts to successive five-year Plans. LIC provided Rs. 7 lakh crores to the 11th 5-Year Plan (2007-2012) while the four general insurance companies contributed about Rs. one lakh crore. These companies have invested heavily in socially purposive schemes, such as housing, roads, rural electrification, municipal sewerage schemes, often at low interest rates. On an initial equity investment of Rs. 5 crores in 1956, the LIC paid out Rs. 1,436 crores as dividend to the government in 2012-13 (this figure had gone up to Rs 2610 crore for 2018-19).
Why will the private sector companies invest the funds mobilised by them according to national development priorities? According to the government’s own reports, over the period 2005-09, of the total infrastructural investment of Rs. 57 thousand crores made by insurance companies, 90% was made by public sector companies; the share of the private sector companies was just 10%, despite the fact that they had a market share of 30-35% in new premium incomes.
Claims Settlement
Performance-wise, it is obvious, that the Indian public sector insurance companies have outperformed the private sector insurance companies of the developed countries too. However, the most important criterion for judging an insurance company is its record of claims settlement. Insurance is a risky business. It is the promise by to pay the costs associated with some future event, based upon the payment of premium by the policy holder. Since this promise is an intangible, the insurance company, after mobilising massive sums, can just declare bankruptcy and vanish.
This in fact was the reason why insurance was nationalised in India. In 1956, life insurance was nationalised; 245 Indian and foreign companies were taken over and amalgamated to establish the LIC. In 1971-72, general insurance was nationalised, four general insurance companies took over the business of 107 private companies, with the GIC as the holding company. Most of the big private insurance companies were controlled by India’s big business houses – the Birlas, Tatas, Singhanias and Dalmias – and they would often defraud their policy holders. Legislation had proven ineffective in checking these practices, and so they were nationalised. Commenting on the innumerable malpractices of these private companies, the then Finance Minister, C.D.Deshmukh, stated in Parliament in 1956: “… the number of ways in which fraud can be practised which was 42 in Kautilya’s days has risen to astronomical figures these days.”
Foreign companies are even more unscrupulous; they routinely pay policy holders as much as 40-70% less than what their policies promise when they suffer tragedies, and hundreds of insurance companies have even declared bankruptcy. A US Congress committee, set up in 1990 to investigate the huge number of bankruptcies in the insurance sector, stated in its report: “…relatively few crooks, scoundrels and incompetents are capable of bankrupting huge companies and possibly the entire industry … Fast operators in the industry are ignoring the rules, creating new schemes to enrich themselves, and walking away unscathed.” Two decades later, things have not changed much. In 2008, the US insurance giant, American International Group (AIG), failed. It had made huge speculative investments in the stock market; when the stock market collapsed in 2008, its investments became worthless; the US government was forced to pour in $150 billion to bail it out, or else, it could have affected the stability of the entire financial system.
In contrast, the Indian public sector insurance companies have been beacons of trustworthiness and reliability. On top of it, the claims settlement ratio for the LIC is an incredible 97%, a world record (and for non-life insurance, it is 74%); while the world average is an abysmal 40%. This is the real reason why they have been able to achieve such high levels of insurance penetration, and mobilise such huge amounts of premium – because the people know, their investments are safe; and in case they suffer a tragedy, they would get the compensation promised.
Why then is the Indian government seeking to privatise these extremely well-performing and profitable public sector insurance companies, and hand over their control to foreign “crooks, scoundrels, fast operators”? The reason: globalisation.
Globalisation: India on SALE
In 1991, the Indian rulers, entrapped in a foreign exchange crisis of their own making, accepted World Bank-IMF conditionalities and decided to globalise the Indian economy and throw it open to foreign investment by the rapacious MNCs of the US and other developed countries. Even since then, the Indian government has been running the economy solely for the profit maximisation of foreign and Indian big business houses. One of the conditionalities of India’s foreign creditors was that the government end its control of the financial sector, and allow foreign MNCs and Indian big business houses to take it over. Obediently, the government has been desperately trying to privatise the Indian insurance sector; if it proceeded slowly, it is only because of the strong resistance put up by the insurance sector employees.
Friends, the heroic struggle of the insurance sector employees has so far prevented the government from privatising public sector insurance and handing over control of people’s savings to foreign brigands. With India’s foreign debt rising to astronomical levels, the Indian economy is now even more in the clutches of foreign corporations and speculators, and they are increasing pressure on the government to privatise the insurane sector. If they succeed in having their way, then not only will the future development of the country will be affected, the very safety of people’s investments/ savings will be at stake – government guarantee will end, and it is not unlikely that the foreign companies may one day choose to declare bankruptcy and vanish, leaving millions of people in deep financial crisis. Therefore, it is important that we join insurance employees in their struggle and demand that the government Immediately Stop Privatisation / Dilution of Government Holding in Public Sector Insurance.
