Modi government's decision to privatise United India Insurance indicates terrible consequences for general insurance sector

Print edition : August 13, 2021

Insurance and public sector bank employees protesting against the Union Budget, in Kochi on February 2. Photo: Thulasi Kakkat

Staff of United India Insurance Company Ltd in front of their office in Dindigul, Tamil Nadu, on July 9, protesting against privatisation of United India Insurance and other public sector companies. Photo: Karthikeyan G.

The Modi government’s move to privatise a public sector general insurance company, threatens to undo years of progress that nationalisation initiated 50 years ago.

THE Narendra Modi government’s penchant for indulging in ambushes as a means of unleashing policies is now all too obvious. Policies whether relating to vaccines or privatisation of key economic entities have been marked by bizarre U-turns, abrupt changes or abandonment of previously announced approaches. The idea of policies seems to be to instil shock and awe, logic and rectitude be damned. A striking case in point is the government’s recent decision to privatise United India Insurance Company Ltd, a public sector general insurance company, abandoning its earlier decision to amalgamate the four public sector general insurance companies.

The provisions of the General Insurance Business (Nationalisation) Act, 1972, which governs the operation of public sector general insurance companies, require the government to hold at least a majority of the stake in these companies. The move to privatise any one of these companies thus requires amendments to the Act, which the government has planned to push through during the ongoing monsoon session of Parliament. It remains to be seen whether the Pegasus scandal, which has rocked Parliament, will derail the attempt, although there is little doubt that the government will be back at it even if it suffers an immediate setback in its attempts.

In 2019, while presenting the Budget for 2019-20, Finance Minister Nirmala Sitharaman announced that the government would initiate the merger of the four general insurance companies, effectively creating something like the public sector behemoth in the life insurance business, Life Insurance Corporation of India (LIC). The Modi government thus seemed to have at last fulfilled a long-standing demand of insurance employees who have ever since the 1990s been demanding an amalgamation of the four companies to give them better focus while competing with the several private companies in the fray. The government hired consultancies to advise it on how to go about with the merger. In fact, reports at the time indicated that the government was seriously considering merging the other three companies into New India Assurance, the biggest general insurance company in India, public or private. Ironically, the about-turn now envisages the sale of United India Insurance.

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In the middle of the pandemic, which has affected every conceivable aspect of the economic life of the country, Nirmala Sitharaman abandoned this approach. In her last Budget speech, while presenting the accounts for 2021-22, she announced that one general insurance company would be privatised. This was in keeping with the revised privatisation policy—announced at the height of the pandemic—which envisages a minimal governmental presence in virtually every sector of the economy. Accordingly, the NITI Aayog was given the task of determining which public sector general insurer would go on the block first. The body, which replaced the Planning Commission but commands far less respect for its academic rigour, determined recently that United India Insurance would be privatised first. An amendment to the law is a must because in its current form the government is prohibited from selling a majority stake in a general insurance company.

General insurance, which means the insurance of just about every conceivable risk, is a business that is closely related to the nature and level of development of a society. Generally, in advanced societies, which also have a degree of state-directed health care provisioning, the premium generated by general insurance accounts for about 55 per cent of the overall insurance business, life insurance accounting for the remaining 45 per cent. However, in India, non-life insurance premiums account for just about one-fourth of all premiums collected by insurance companies.

Transfer of risks

An important facet of general insurance is that it is meant to mitigate risks that companies would have to bear while running their operations. This means that companies transfer the burden of risks outside their main areas of activity. Thus, by paying a small premium, a company involved in marine fishing transfers the risks of losses arising from, say, destruction of its fleet in a cyclone. A high level of insurance protection in an economy is thus a measure of its maturity. The fact that general insurance levels are still very low in India indicates that economic agents continue to bear a significant proportion of the risks, which hinders their growth and affects the overall development of the economy.

This was the rationale for the wholesale nationalisation of the general insurance business in India in 1971, 15 years after the formation of LIC. Initially, an ordinance was issued, leading to the passage of the General Insurance Business(Nationalisation) Act, 1972, and resulting in the nationalisation of 107 companies involved in the general insurance business. This led to the formation of General Insurance Corporation (GIC), structured as a holding company under which the four general insurance subsidiaries were to function.

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Later, in the 1990s, the role of GIC was transformed into that of a reinsurer, an insurer of insurers if you will. These changes were prescribed by the Malhotra Committee, which soon after liberalisation initiated the first steps towards reversing the steps taken since the nationalisation of the banking and insurance sectors in India. The rationale for these changes, instead of strengthening the public presence in insurance, was making public insurance companies suitable for sale at an opportune moment.

The unions too welcomed the merger proposal because they believed that the original logic of having the four companies focus in specific geographies had outlived its utility since all of them in any case had pan-Indian operations. While National Insurance was based in Kolkata, New India Assurance was headquartered in Mumbai, Oriental Insurance in New Delhi and United India Insurance in Chennai.

The opening up of the insurance sector in stages has, however, created an uneven field, with successive rounds of liberalisation putting the public sector companies under greater pressure. The consortium of the four companies, under the umbrella of the General Insurers Public Sector Association, has a business that accounts for about 40 per cent of the total general insurance business in India. The companies have never had to turn to the government for funding; instead, they have been generating dividends. However, roughly after the Modi government assumed office in 2014, the companies have been in some trouble. Employees point out that three of the four companies—National Insurance, Oriental and United India Insurance—have been rudderless since then, either because they have no chairman and managing director or they had one that only enjoyed a tenure of less than a year. Union sources also point to the fact that senior positions have remained vacant, which has hampered business decision-making in the companies.

Of immediate concern is United India, the second biggest public sector general insurance company in India in terms of market share. The company, which was founded in 1938 by the same group that founded Indian Overseas Bank, insures 1.47 crore families under the Tamil Nadu Chief Minister health insurance scheme and the Mahatma Jyothiba Phule Bima Yojana policy in Maharashtra. It also insures 4 crore people under various schemes run by the Centre.

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Two factors have skewed the field against public sector insurance companies. While the Insurance Regulatory and Development Authority of India (IRDAI) has increasingly acted as an agent in prising open the market in favour of private companies, the sharp business practices of private companies has placed public sector companies at a disadvantage. For instance, the introduction of Motor Insurance Service Providers (MISP) has allowed private insurance companies to draw business away from public sector companies as now automobile dealers can act as an intermediary for insurance policies. The unions, for instance, allege that private insurance companies flout restrictions on payouts to automobile dealers, while public sector companies abide by the rules governing such commissions. Similar violations are also rampant in the health insurance business, particularly by stand-alone health insurance companies, which pay commissions to agents far in excess of the limit set by the IRDAI. The unions also allege that the IRDAI’s failure to inspect the operations of private insurance companies or its imposition of paltry fines even when it does has allowed the companies to mock at the regulations. They have called for forensic audits of private insurance companies’ motor insurance business, by professional external auditors.

In a recent letter to the Vice Chair of NITI Aayog, the leadership of the National Confederation of General Insurance Officers’ Associations pointed out that a consolidation of the companies, instead of their outright sale, was what was needed to revitalise the companies in the pandemic. It is obvious that privatisation is the primary means by which a consolidation is being forced. Data issued by the IRDAI show that in June 2021 New India Assurance, United India Insurance and Oriental Insurance together accounted for more than one-third of the entire Indian general insurance market. If one adds the share of National Insurance Company, the market share of the public sector increases to about 42 per cent. In fact, only one private insurer, ICICI Lombard, has a market share that is comparable to the shares of the public sector companies. What this reveals is that the general insurance market is extremely fragmented among more than 30 other entities, each enjoying a small fraction of the market. Seen from this perspective, it is obvious that privatisation is being used as a cudgel to break open the market for private companies.

Terrible consequences

But this is not just a matter of market shares. There are likely to be terrible consequences for the economy and society if consolidation proceeds as a result of the elimination of the public presence in the business. For one, as the experience from private insurance companies is already revealing, private insurers are likely to strenuously deny claims if and when they occur. Moreover, there is every likelihood that premiums will increase as a result of this consolidation. Both these developments will have a chilling effect on both the willingness of business agents to purchase insurance or to seek adequate protective insurance coverage. Rising premiums and arbitrary exclusions are likely to act as formidable barriers to insurance penetration. Small businesses, already hit by the pandemic, are likely to be deterred even more from buying insurance by the methods private insurers adopt. This would hamper the growth of the general insurance sector in India, which is already lagging behind those available to business entities in competing markets across the world.

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The greatest effect of nationalisation in the general insurance business has been the widespread adoption of insurance as a protective cover. Even after the wave of liberalisation, public sector companies have been able to hold their own because they have been a powerful countervailing force to private companies, some of which are backed by international finance. Privatisation is nothing but the forced attempt at evicting them from the market in order to facilitate a consolidation of private power in the business. The retrogressive move casts a shadow over much more than just the security of jobs of those working in the industry.

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