The first big step towards privatisation of the life insurance sector was taken by the Vajpayee-led NDA government in 1999, when it permitted private firms to enter both the life insurance sector, subject to a cap of 26% on ownership by foreign firms. Subsequently, the Modi-led NDA government got the Parliament to amend the law to permit foreign insurance companies to acquire majority holding in Indian private sector insurance companies.
These measures have led to large number of private companies, including foreign corporations, entering the Indian insurance sector. Presently, apart from the public sector LIC, there are 23 private life insurance companies operating in India.
Now, the Modi-led NDA Government has begun the privatisation of the only public sector life insurance company in India, the Life Insurance Corporation of India (LIC), which is among the best insurance companies in the world. It is also permitting foreign investment in it — a prelude to its eventual takeover by giant foreign insurers. In 2022, after making the necessary legal amendments, the Modi Government sold off 3.5% of its shares in the LIC. The IPO got an overwhelming response, and the government earned Rs 20,557 crore from the sale.
Illegal Sale
The government has really no right to privatise the LIC, as ethically speaking, it is not the owner of the LIC. LIC is a unique company in the world of finance. Since its inception, till the government passed the LIC Amendment Act in 2021, it functioned like a cooperative or a mutual company, where the members of the company were its policyholders. The participating policyholders funded the expansion of LIC. They shared the profits and the losses from the non-participating policies . So, the policyholders were actually the real shareholders. The government, apart from an initial equity of Rs 5 crore in 1956, has never ever made any investment in the LIC; the entire growth and expansion has been done through policyholders’ money. Hence it was that the LIC distributed 95 per cent of its profits to the policyholders and only 5 per cent to the government — in return for its equity investment at the time of formation of the LIC. There was no appropriation of the profits of the LIC by any external body. So, the government’s share in LIC ownership can at the most be considered to be 5%.[1]
Despite this, the government in 2021 declared that it was the owner of the LIC, arm-twisted the Parliament to push through an amendment to the LIC Act that effectively expropriated the policyholders from their ownership rights over the company, and announced that it was going to sell off a part of its shareholdings, even to foreign investors, to meet its fiscal needs! With the government now selling 3.5% of these shares to private individuals, the new acquirers of the company would effectively have a claim over the huge assets of the LIC, towards whose acquisition neither they nor the government have contributed anything.
Undervaluation Scam
While it is difficult to estimate the true value of LIC, a comparison with the IPO Floats of LIC’s peers SBI Life and HDFC Life suggests that the government should have valued the LIC share at at least between Rs 3,216 to Rs 3,386. However, the Modi government priced the value of each share at just Rs 938, earning the government only Rs 20,765 crore from the sale of 3.5% of its shares.[2] The implicit loss to the exchequer, even if one forgets for the moment the utter idiocy of the privatisation exercise (that we discuss below), is thus at least Rs 55,000 crore.
But the biggest scam of all is that the privatisation exercise is going to have disastrous consequences for the crores of policy holders of the LIC; it is also going to adversely affect the Indian economy. Let us see how. For that, it is necessary to take a look at the history of LIC.
Since insurance is only a promise by the insurance company to pay the costs for some future event, it makes the insurance business particularly susceptible to fraud and malpractice. On a small equity base, massive funds can be mobilised, and then the insurance company can just declare bankruptcy and vanish — making it an ideal hunting ground for fly-by-night operators.
This is precisely the reason why the insurance sector was nationalised in India. At the time of independence, the insurance industry in India was entirely in the private sector. However, the private insurance companies were indulging in innumerable malpractices and even outright swindling. Companies would simply declare bankruptcy and vanish, depriving lakhs of policy holders of their life’s hard-earned savings. Most of the big private insurance companies were controlled by India’s big business houses — the list included some of the best known industrialists Birlas, Tatas, Singhanias and Dalmias; and they would often siphon off the resources raised from policy holders into other enterprises. Such was the scale of the loot and plunder that during the decade 1945–55, as many as 25 life insurance companies went into liquidation.[3]
Legislation had proved totally ineffective in checking these frauds. Commenting on the ingenuity of the private insurance companies in circumventing legislation to defraud policy holders, the then Finance Minister, C.D. Deshmukh, made the following observation in Parliament on 3 March 1956: “No amount of control can prevent frauds. And the number of ways in which fraud can be practised which was 42 in Kautilya’s days has risen to astronomical figures these days.”[4]
And so the Nehru government decided to take over the private insurance companies and nationalise the insurance sector. 245 Indian and foreign companies were taken over and amalgamated to establish the LIC.
Expectations from LIC
While nationalising insurance, the then Finance Minister C.D. Deshmukh outlined the following objectives for the LIC in a statement in Parliament on 29 February 1956: [5]
- insurance must be run as an essential social service;
- the insurance business must be not be run with profit motive, but must be conducted with the utmost economy and with the full realisation that the money belongs to the policyholder;
- the fund must be invested so as to secure the maximum yield for the policyholders, consistent with the safety of the capital;
- insurance is one of the means of channelising domestic savings for meeting infrastructural and social investment needs according to national priorities.
LIC Fully Justifies Faith Reposed in it
The LIC has fully justified the faith reposed in it. Since its establishment in 1956, LIC has reached out to almost every household in the country. India has 24.8 crore households, while LIC has around 40 crore LIC policy holders![6]
Over the last nearly seven decades, the total amount of policyholders’ funds managed by the LIC has simply skyrocketed. Starting from an equity investment of Rs 5 crore and a Life Fund of Rs 448 crore, today, the LIC has Rs 38 lakh crore as assets under management, its investments in the economy have surpassed Rs 36 lakh crore, and it has a Life Fund of Rs 34 lakh crore — mindboggling figures indeed.[7]
Clearly, LIC has more than succeeded in mobilising people’s savings. And it has channelised them towards meeting national development priorities. It has made huge investments in government securities, infrastructure projects and socially oriented schemes. Its investments in infrastructure and the social sectors include areas like: projects for generation and transmission of power; housing sector; water supply and sewerage projects; and development of roads, bridges, road transport and railways. Many of these schemes have been given funds at a lower than market rate.[8]
The reason for this huge success of the LIC in mobilising people’s savings is its public sector nature. It has not indulged in any embezzlement of people’s savings deposited with it. It has fully upheld the objectives laid out by the Nehru government when it established the LIC.
One of the best ways to measure the reliability of an insurance company is its claims settlement record. The figure for LIC for 2020–21 was an incredible 98.62%, amongst the best in the world.[9] The world average is an abysmal 40%. Even the world’s biggest insurance firm, Prudential, has settled only 45 per cent of its claims.[10] This is yet another proof that the LIC has always kept the interests of policyholders paramount in its operations.
Myths About Private Insurance
The Modi government has been claiming that partial privatisation of the LIC would enable greater private participation in the LIC, would lead to capital inflows into the insurance sector, help insurance penetrate the marginalised areas and enhance insurance penetration, improve the administration and accountability of the insurance companies, improve transparency, better secure the interests of policyholders, contribute to faster growth of the economy, etc. etc.
The facts given above about the astounding performance of the LIC make it clear that most of the claims being made about the benefits of privatisation of the insurance sector — that it would help improve transparency and accountability, better secure the interests of policy holders, and so on — are all humbug.
The argument that it would lead to greater inflows of capital into the insurance business is absurd. Not only has the LIC been enormously successful in mobilising people’s savings, it also generates between Rs 4 to 5 lakh crore investible surpluses annually; therefore it has no need to access capital markets for funds to expand business activities.[11]
Will Privatisation lead to Improved Insurance Penetration
Insurance penetration is defined as the ratio of total premium income to the gross domestic product (GDP) of the country. Actually, the insurance penetration in India is bound to be low as compared to countries with much higher per capita incomes. That is because as the Swiss Reinsurance Company points out in one of its reports (called Sigma), “Demand for insurance depends on disposable income.”[12] The amount of income a person would be willing to spend on insurance depends on his/her income level. In a country where more than 70% of the population lives at or below subsistence levels, obviously the percentage of population with savings to spare for spending on insurance is going to be very small.
Despite this constraint, the performance of the LIC in mobilising premiums has been remarkable. Life insurance penetration in India is 3.2%, which is very close to the global average of 3.3%! This fact is admitted by the Economic Survey 2021–22 of the Modi Government. Astonishingly, life insurance penetration in India is higher than that for the United States (3%) and Germany (2.8%)![13] This high level of insurance penetration is all the more remarkable, given that these countries have a per capita income 20 times that of India.
The reason for this amazing performance of the life insurance sector in India achieving insurance penetration levels comparable to the developed countries is not because of the entry of private players in the insurance sector, but despite it. The entire focus of the private insurers is on maximising their profits, and minimising expenses. So, the thrust of the private insurance companies has been on opening offices in the bigger cities as compared to small towns and rural areas. On the other hand, in keeping with the objectives set out at the time of its establishment in 1956, the LIC has not focussed on the profit motive, it has considered insurance as an essential social service, and sought to spread the message of insurance as far and as wide as possible, reaching out beyond the more advanced urban areas and into hitherto neglected, namely, rural areas. And so it is that while the 23 private insurers together have nearly 30% more offices than the LIC, the bulk of their offices are concentrated in metro-cities and urban areas — which account for 77% of their offices. On the other hand, only 37% of LIC offices are in metros and urban areas. It has more than double the number of offices than all the private insurers combined in semi-urban areas, and triple the number of rural offices (See Table 1).
Table 1: Distribution of Offices of Life Insurers in India[14]
| Metros | Urban | Semi-urban | Rural | Total | |
| LIC | 853 | 976 | 2932 | 171 | 4932 |
| Private | 1909 | 2983 | 1397 | 58 | 6347 |
The difference in focus between the LIC and private insurance companies is also sharply brought out by the huge difference in their average premium size. For the year 2020–21, the average annual premium of a policy sold by LIC was a little over Rs 16,000 while for the private sector it was more than five times this amount — Rs 89,000. This implies that the private sector is more interested in selling policies to the upper middle classes and the rich, from whom it can get higher premiums per policy, while the LIC is seeking to expand the reach of insurance to all sections of society, including the weaker sections.[15]
And so, despite the entry of 23 private life insurers in the Indian market, many of which are joint ventures of India’s big private corporate houses with the world’s biggest insurance companies, and despite most of them operating in the Indian market for more than two decades now, the total people’s savings mobilised by the LIC is several times more than that of all the private insurers combined (Table 2).
Table 2: Investments of Life Insurers, India (as on March 31, 2021) (in Rs lakh crore)[16]
| Life Fund | Total Investments | |
| LIC | 24.6 (84.5%) | 34.0 (75.9%) |
| Private Insurance Companies | 4.5 | 10.8 |
| Total | 29.1 | 44.8 |
All this means that as privatisation advances, the entire orientation of LIC is going to change:
- It will more concentrate on elite business with high premiums to the neglect of socially necessary insurance for the weaker sections of the society.
- It will focus more on urban and metropolitan centres at the cost of rural India.
Privatisation: Euphemism for Private Loot of Public Savings
In all these claims about the benefits of privatisation of insurance, one important question that needs to be asked, but which no one is even mentioning, is about the security of people’s savings. As we have explained above, the insurance business is a high risk business, and the chances of insurance companies running into huge losses are very high. It is also a business susceptible to frauds. India’s life insurance sector was entirely in private hands till the early 1950s; malpractices and frauds were rife; dozens of companies ran up huge losses and closed down. This was the reason why the Nehru government nationalised life insurance in 1956 and set up the LIC.
Once the LIC is privatised, will the savings of the people remain secure? Privatisation would mean government guarantee of people’s savings deposited with the LIC would end. The control of these savings will pass into the hands of the very same companies who had earlier indulged in outright swindling of people’s hard-earned life savings. And the assets of the LIC are huge — Rs 38 lakh crore. This amount is nearly double the estimated net tax revenue of the Central government for the year 2022–23.
Foreign Control Over LIC
The Modi government had earlier permitted foreign investors to not only enter but also take control of private insurance sector. Now, it is permitting foreign investment in LIC too. Very soon, it is going to permit foreign investors to acquire majority stake in the LIC. This will put the investments of crores of India’s low-income policyholders at risk!
A recent report of the American Association for Justice (a nonprofit advocacy organization for trial lawyers in the United States) on the US insurance industry released in February 2017, says that while “U.S. insurance industry has trillions of dollars in assets, enjoys average profits of over $30 billion a year”, yet, American insurance companies “engage in dirty tricks and unethical behavior to boost their bottom line even further.” It goes on to say that they have “endeavored to deny claims, delay payments, confuse consumers with incomprehensible insurance-speak, and retroactively refuse anyone who may cost them money.”[17]
Worse, dozens of insurance companies in the developed countries have been declaring bankruptcy every year, because of speculative investments and unethical practices.[18] In the US, the number of failures reached such scandalous proportions that a sub-committee of the US House of Representatives investigated insurance companies’ insolvencies. In its report titled Failed Promises — Insurance Company Insolvencies submitted in February 1990, the committee stated that the insurance industry is threatened by “scandalous mismanagement and rascality” that could trigger widespread failures. It went on to say that “the driving force” behind these “deplorable management attitudes” 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.”[19]
That was more than three decades ago. Things have not changed much since then. Several dozens of insurance companies, including big names like the Penn Treaty Network America Insurance Company, have gone bankrupt in the USA in the past 30 years.[20] The biggest failure of all was the collapse of the global insurance giant American International Group (AIG) in September 2008. AIG was the world’s biggest insurer in terms of market capitalisation.[21]
The US Congress subcommittee investigating the large number of failures of insurance companies in the USA came to the conclusion: “The business of insurance is uniquely suited to abuse by mismanagement and fraud.” It further stated: “a relatively few crooks, scoundrels and incompetents are capable of bankrupting huge companies, and possibly an entire industry…. Fast operators in the industry are ignoring the rules, creating new schemes to enrich themselves, and walking away unscathed.”[22]
Note that these reasons for the failures of insurance companies in the US are the same as those given in 1956 by the then Finance Minister C.D. Deshmukh for the failures and losses afflicting India’s private insurance sector, because of which the Nehru Government had decided to nationalise the insurance industry.
Seven decades later, the wheel has come full circle. The Modi Government has decided to hand over India’s public sector insurance back into the hands of the very same ‘crooks’, ‘scoundrels’ and ‘fast operators’.
Why is Modi Govt. Privatising LIC?
The LIC has a Life Fund of more than Rs 34 lakh crore. Why is the Modi Government privatising the LIC, thereby endangering the safety of this huge amount of people’s savings deposited with it?
That is because the Modi Government is totally beholden to foreign and domestic big corporate houses, and has been running the economy solely for their profiteering. To give a few examples:[23]
- The Modi Government has handed over control of the country’s mineral wealth and resources to private corporations in return for negligible royalty payments, transferred ownership of profitable public sector corporations to foreign and Indian private business houses at throwaway prices, given direct subsidies to private corporations in the name of ‘public–private–partnership’ for infrastructural projects, and so on. These transfers of public wealth to private coffers have resulted in enormous losses to the public exchequer — of the order of several lakh crore rupees every year!
- It has been giving various tax exemptions to the rich of several lakh crore rupees every year. An analysis of the Union Budget documents reveals that these exemptions total at least Rs 44 lakh crore over the period 2014–22.
- Since it came to power in 2014, the Modi Government has written off, or is in the process of writing off, around Rs 25–30 lakh crore of loans to big corporate houses.
- And now the Modi Government is handing over control of people’s savings — totalling more than Rs 34 lakh crore — also to these corporate houses!
There is absolutely no doubt that the Modi government is the most anti-people government to have come to power at the Centre since independence.
Notes
1. V. Sridhar, “LIC ‘Disinvestment’: Outrageous Idea”, Frontline magazine, 28 February 2020, https://frontline.thehindu.com; Sarah Thanawala, “LIC IPO: How Is it the Biggest Privatisation Scam in India?”, 13 May 2022, https://theleaflet.in; Amanulla Khan, “As the Mega LIC IPO Looms, Did it Fulfill the Objectives of Nationalisation?”, 30 January 2022, https://thewire.in.
2. V. Sridhar, “Grossly Undervalued, LIC’s IPO Is the Most Controversial Ever”, 4 May 2022, https://thefederal.com; “How LIC’s Stock Market Investments Stack Up”, 23 February 2022, https://bfsi.economictimes.indiatimes.com.
3. Jayati Ghosh, “The Indian Economy: 1998–99, an Alternative Survey”, Delhi Science Forum, New Delhi–19, p. 80; R. Padmanabhan, “Against Privatising Insurance”, Frontline, April 9–22, 1994, pp. 111–12, https://frontline.thehindu.com.; “HT THIS DAY: January 20, 1956 – India to Nationalise Life Insurance Business; Govt Take Over Management of Companies”, https://www.hindustantimes.com.)
4. “Lok Sabha Debates – Parliament Digital Library”, https://eparlib.nic.in/bitstream/123456789/56176/1/lsd_01_12_03–03–1956.pdf.
5. “Eminent Parliamentarians Monograph Series”, https://eparlib.nic.in/bitstream/123456789/58691/1/Eminent_Parliamentarians_Series_Chintaman_Deshmukh.pdf; “HT THIS DAY: January 20, 1956”, op. cit.
6. Amanulla Khan, “LIC IPO: Privileging Shareholders over Policyholders”, EPW, 12 March 2022, https://www.epw.in.
7. Ibid.; “LIC’s Asset Base Goes Past Rs 38 Lakh Crore in Fiscal 2021”, 2 September 2021, https://www.ibef.org.
8. “Yes, Insurance Needs Better Cover But Not With Foreign Capital”, The Hindu, 26 February 2013, http://www.thehindu.com; Aspects of India’s Economy, Nos. 26–27, p. 148, Published by RUPE, Prabhadevi, Mumbai–25.
9. “Latest Life Insurance Claim Settlement Ratio of Companies in 2022”, 7 January 2022, https://economictimes.indiatimes.com.
10. “The Rediff Business Interview: N M Sundaram”, 1 December 1998, https://m.rediff.com. Note: This is an old statistic. We have not been able to get any latest statistic on average world claim settlement ratio. But from media reports about the continuing defrauding of consumers by the global insurance industry, some of which we cite later in this article, it is obvious that this ratio wouldn’t have improved much since.
11. Amanulla Khan, “LIC IPO: Privileging Shareholders over Policyholders”, op. cit.
12. Cited in: Aspects of India’s Economy, No. 28, p. 22, Published by RUPE, Prabhadevi, Mumbai–25.
13. Figures for 2020. “World Insurance: the Recovery Gains Pace”, Sigma No 3/2021, p. 38, https://www.swissre.com.
14. “Number of Life Insurance Offices in India as of Financial Year 2019, by Region”, https://www.statista.com.
15. Amanulla Khan, “LIC IPO: Privileging Shareholders over Policyholders”, op. cit.; Thomas Franco, “Selling the Golden Goose for a Pittance – Does Our FM Know What LIC Is?”, 15 January 2022, https://www.cenfa.org.
16. IRDAI Annual Report, 2020–21. Note: Since then, these figures have been revised, and latest figures released by LIC say its investments and life fund have crossed Rs 36 lakh crore and Rs 34 lakh crore respectively in March 2021. But we do not have figures for India’s private sector companies, so we are giving the older figures from IRDAI report.
17. “Tricks of the Trade: How Insurance Companies Deny, Delay, Confuse and Refuse”, https://www.jacksonandwilson.com.
18. Jayati Ghosh, op. cit., p. 79.
19. “Failed Promises: Insurance Company Insolvencies: a Report, Volume 4”, 1990, https://books.google.co.in; see also: Robert A. Rosenblatt, “House Report Sees Peril in Insurance Industry … Study Finds ‘Scandalous Mismanagement’ Could Set Off Widespread Failures”, 24 February 1990, https://www.latimes.com.
20. “Bankruptcy of Insurance and Reinsurance Companies in the United States”, Atlas Magazine, January 2019, https://www.atlas-mag.net.
21. C.P. Chandrasekhar, “Importing Risk into Insurance”, 17 October 2012, https://www.networkideas.org.
22. “Failed Promises: a Report, Volume 4”, 1990, op. cit.
23. For a detailed discussion on this, see our article: Neeraj Jain, “Budget 2022–23 What Is in it for the People, Part V – Proposal for an Alternate, People-Centric Budget”, Janata Weekly, March 20, 2022, https://janataweekly.org.
