Letter to the Editor
Once, when not in office, the BJP opposed foreign entry into the insurance sector, while supporting the entry of private Indian insurance firms. In fact, it opposed a bill by the United Front government to allow private firms’ entry on the ground that it would also allow foreign participation. The BJP claimed their stand reflected the difference between Congress-style liberalisation and ‘swadeshi’-style liberalisation.
However, this distinction had little meaning, since all the Indian corporate sector firms which wanted to enter the insurance sector had already tied up with foreign partners: Alpic Finance with Allianz Holding, Germany; Tatas with American Int Group, U.S.; C.K. Birla Group with Zurich Insurance, Switzerland; ICICI with Prudential, U.K.; Sundaram Finance with Winterthur Insurance, Switzerland; Hindustan Times with Commercial Union, U.K.; Ranbaxy with Cigna, U.S.; HDFC with Standard Life, U.K.; Bombay Dyeing with General Accident, U.K.; DCM Shriram with Royal Sun Alliance, U.K.; Dabur Group with Liberty Mutual Fund, U.S.; Kotak Mahindra with Chubb, U.S.; Godrej with J. Rothschild, U.K.; Sanmar Group with Glo, Australia; Peerless with Guardian Royal Exchange, U.K.; ITC with Eagle Star, U.K.; S.K. Modi Group with Legal & General, Australia and QBE, Australia.
As the general election neared, the BJP leaders began hinting that they would allow foreign equity if the Indian partners so desired (see Aspects no. 25, p. 28). And now, on November 23, 1998, the BJP government at the Centre has cleared the way for entry of foreign firms into the insurance sector. Initially, the total foreign equity permissible would be 40 per cent — 26 per cent to the promoters and 14 per cent to non-resident Indians (NRIs), foreign institutional investors (FIIs) and overseas corporate bodies (OCBs).
Accordingly, an Insurance Regulatory Authority Bill will be introduced in Parliament with the necessary amendments to the LIC Act, 1956, the General Insurance Business (Nationalisation) Act, 1972, as well as the Insurance Act, 1938. (The first two Acts establish LIC and GIC as the sole insurance providers in their respective fields of life and general insurance.) The insurance employees’ unions and other trade unions have announced that they will fight the Government’s plans. We have yet to see what comes of the BJP-led regime’s latest move.
We received the following letter to Aspects from a veteran trade unionist in the insurance field two months ago. In the light of the recent developments, it is all the more relevant.
— Editor.
The air is nowadays thick with stories about the Government’s decision to open up the insurance sector — both life and non-life — to private insurance companies. Originally, the Finance Minister, Yashwant Sinha, was talking of allowing into this sector only 100 per cent domestic Indian companies. But later the Government changed its tune; now it is talking of allowing foreign insurance companies a share of between 20 and 26 per cent (this range representing the difference of opinion in the Cabinet).
It is a mark of the times that even before any decision has actually been taken about this, as many as 19 Indian companies had signed memoranda of understanding with foreign insurance companies to jointly enter the insurance sector. These include major Indian industrial houses such as Tatas (with American Int. Group, U.S.), C.K. Birla group (Zurich Insurance, Switzerland), Godrej (J. Rothschild, U.K.), Sundaram Finance (Winterthur Insurance, Switzerland), and so on.
Right since 1988-89, the U.S. government had been demanding that insurance be "thrown open to international competition". The All-India Insurance Employees’ Association, representing over 80 per cent of the LIC and 40 per cent of the GIC employees, immediately opposed this pressure. The Government of India too at the time opposed the U.S. demand.
However, by 1991 things began to change. The Government of India had opted for a loan from the IMF and the IMF in turn imposed certain conditionalities regarding financial management of the economy. With Manmohan Singh as a Finance Minister in the Narsimha Rao government, opening up of the banking and insurance sector became the official agenda. Just as the Narasimham Committee was appointed to press for privatisation of the banking industry in the name of reforming that sector, the Malhotra Committee led by the former Governor of the R.B.I. was appointed to recommend ‘reforms’ in the insurance sector. On 7th January, 1994, Malhotra submitted his report to the Government. Its main recommendations were as follows:
1) Privatise Life Insurance Corporation (LIC) and General Insurance Corporation (GIC).
2) Allow foreign and Indian companies to enter both life and general insurance as joint companies;
3) Establish an ‘Insurance Regulatory Authority’.
4) Stop all expansion programmes of the LIC and GIC.
The All-India Insurance Employees’ Association (AIIEA) immediately launched a campaign to oppose these recommendations tooth and nail. Other unions in the industry, from Class I to Class IV, took an identical position of total opposition to these moves.
As the major union and the organisation with the background of important struggle the initiative was seized by the AIIEA to launch a many-sided struggle against the move of the Government to go ahead with the recommendations of the Malhotra Committee. This included, apart from strikes and rallies, such actions as holding policy-holders’ conventions, writing articles in the Press, and torchlight processsions and ‘jathas’ moving from place to place in many parts of the country. Over 1,000 conventions of policy-holders were held, some of them attended by as many as 20,000 people from all walks of life. Over 10,000 prominent citizens of India, well-known economists, and academicians, wrote letters to the Prime Minister Narasimha Rao opposing privatisation of the insurance sector. As many as six state assemblies passed unanimous resolutions opposing the move. But the most telling programme was a signature campaign across the whole country, which totalled a record of over 66 lakh signatures by people from all walks of life. These were presented to the Prime Minister Narasimha Rao.
This determined campaign had its effect. The Government, sensing the mood of public opinion, agreed to constitute an all-party committee of Parliament to examine the matter. The President of AIIEA, com. Saroj Chaudhari, made a very convincing presentation before the Chairperson of the Committee, Smt. Sushma Swaraj and other members. The Committee was forced to modify the recommendations. The LIC and the GIC would remain in the public sector and were not to be privatised as recommended by the Malhotra Committee.
However, the field remained open to private companies, both Indian and foreign, to come in in the name of competition. In the long run, this would mean ruin of the insurance industry, as had happened in the past in the country before nationalisation of the sector, and as was happening the world over.
So the opposition and campaign continued. Activists of the organisation approached MPs, MLAs, and other important persons in their area, explaining to them why they were opposing even this opening up. Articles and letters to editors continued. A National Convention is now being planned. The campaign generated pressures for thorough unity of all organisations of both LIC and GIC, including organisations of their officers, development officers and even of agents. A lot of literature in English, Hindi and the other Indian languages was issued to educate the activists, employeees, and the general public. Trade unions, students’ and women’s organisations, and in some parts of the country even peasant organisations supported our campaign.
When on August 19, 1997, P. Chidambaram, Finance Minister in the United Front government, tried to move the Insurance Regulatory Authority Bill in the Lok Sabha, it was greeted with a howl of protest in the Lok Sabha. Even Atal Behari Vajpayee’s attempt to give the Bill a lease of life proved of no avail, and even BJP MPs stoutly opposed it. MPs cutting across party lines, led by the MPs of the left parties, opposed it and finally the Prime Minister Gujral himself had to agree to its withdrawal. Although the Finance Minister tried to explain away the matter by saying that the Bill did not mean the privatisation of the insurance industry, no one was taken in by his explanation. Such was the overall political impact of the movement launched by the employees, led by the AIIEA, that the effort to bring in the other recommendations of the Malhotra Committee also failed.
Nevertheless, today, the present BJP-led coalition government has persisted in going ahead with the attempt to privatise and bring in foreign insurance companies. They may also bring in an ordinance to achieve their objective. So, insurance employees and officers in both LIC and GIC have again formed a joint front and have planned a strike if the bill is introduced. They have also planned a national convention and a giant morcha in Delhi, besides demonstrations and rallies.
Thus for the past several years the insurance employees through their tenacious struggle have not allowed the Government to bring the proposed opening to bring in private insurance companies. Even the foreign multinational companies are struck by the tenacity of the resistance put up by the insurance employees’ organised movement. Some time back an IMF publication revealed that it had earmarked several millions of dollars to overcome this resistance.
Why are the insurance employees opposing privatisation tooth and nail? Their opposition is not merely for protecting their own security. The interests of policy-holders, of the industry itself, and the broader interests of more balanced and secure socio-economic development of the country are objectively involved.
Let us take these one by one.
The All-India Insurance Employees’ Association came into being in the city of Bombay on 30th June/1st July 1951. The very first resolution of its founding conference incorporated its demand for the nationalisation of the entire insurance industry. This was because company after company in the sector was going bankrupt, depriving lakhs of policy-holders of their life’s hard-earned savings, besides throwing thousands of employees out of employment. Frauds and misappropriations, mismanagement and arbitrary investment had put the industry on the verge of ruin. So this inefficiently run industry must be nationalised, said the resolution and the policy-holders must be saved from the clutches of unscrupulous operators.
The Association, which was the only union of insurance employees at the time, carried on an intensive campaign to realise the demand of nationalisation. After four and a half years of intensive struggle, in January 1956 the Nehru government was forced to nationalise the life insurance industry. With the 246 taken-over insurance companies the LIC of India was formed as a public sector corporation.
C.D. Deshmukh, then Finance Minister, in his radio speech on 19th January 1956 as well as later in the Lok Sabha, had made the following points justifying nationalisation:
1) That at the time of takeover, 25 insurance companies were already bankrupt and another 25 were on the verge of bankruptcy.
2) That ‘trust’ forms the very basis of the insurance industry, but he had found most insurers had not even the faintest idea of such a requirement.
3) Frauds and misappropriations were abundant, and he narrated several instances. In one, a company chairman had invested Rs 35 lakh in a project. If it yielded profit, the profits were to be credited to his personal account; if there were losses, they were to be debited to the accounts of the insurance company. When Pherozeshah Mehta pointed out that the insurance companies were indulging in all the 42 ways of swindling funds mentioned by Kautilya in his "Artha Shastra", Finance Minister C.D. Deshmukh had reiterated in the Lok Sabha that the insurers had increased the methods of swindling manifold since the days of Kautilya. To quote him:
"...that life insurance today was not managed either efficiently or with an adequate sense of responsibility.
"The conclusion that finally emerged confirmed our apprehensions. The industry was not playing the role expected of insurance in a modern State, and efforts at improving the standards by further legislation, we felt, were unlikely to be any more successful than in the past. The concept of trusteeship which should be the cornerstone of life insurance seemed entirely lacking.... Even the first examination pointed to nationalisation as the obvious step."
About service to policy-holders, Deshmukh said:
"Now in the matter of service to policy-holders, many companies systematically postpone or avoid payment of claims until of course forced by legal means."
The former chairman of LIC of India, M.G. Diwan, speaking before the 38th Annual Conference of the Insurance Institute of India n 26th September 1993, had this to say:
"Prior to our gaining political independence, many insurance companies — both foreign and Indian — were operating in India. However, their business remained confined to the urban centres. The performance of the industry was stagnating.... Only a few of the companies were running on sound lines. The focus of the companies was on the affluent classes..."
In sum, it can be emphatically stated that the history of private insurance in India before nationalisation was a history of stagnation, default, falsification and denial of claims, inter-locking of funds, other malpractices and outright swindling. It is a story of utter inefficiency and dismal failure. This history had been recorded with the Government of India, and yet the Malhotra Committee did not even refer to it while recommending privatisation. On the other hand we are told that entry of the private sector ‘will improve’ customer service and efficiency.
Immediately after nationalisation, the AIIEA had sent a telegram to the then Finance Minister, C.D. Deshmukh, congratulating him on the decision and assuring full support of the employees in making the nationalised set-up a grand success. Replying to the prophets of doom, while piloting the LIC Bill 1956 in the Lok Sabha, Deshmukh flaunted this telegram and told the MPs that the employees were totally behind him. Subsequent developments have proved that the prophets of doom were belied and the LIC and later the GIC put up a spectacle of all-round growth and progress; employees, officers, development officers and agents have collectively proved that public sector insurance can be a huge success.
The following few statistics tell the story of this success.
| Item | As on 31/12/57 (immediately after nationalisation) | As on 31/3/98 |
| 1. Number of policies issued during the year (lakh) |
9.42 |
133.11 |
| 1a. Number of policies in force (lakh) | 56.86 |
1,100 (11 cr.) |
| 2. Total premium income during the year (Rs. cr.) |
88.65 |
19,252.07 |
| 3. Total income incl. investment income during yr. (Rs.cr.) |
107.15 |
30,732 |
| 4. Dividend to the owners (on a capital for the year of Rs 5 cr.) (Rs. cr.) |
-- |
198.35 |
| 5. Overall expense ratio (%) | 27.3 | 20.53 |
| 6. Renewal expense ratio (%) | 15.89 | 6.09 |
| 7. Outstanding claims ratio (%) |
38.5 (as on 31/3/63) |
3.19 |
| 8. Life fund as at the end of the year (Rs. cr.) |
410.4 |
1,05,832 |
| 9. Percentage of rural business (%) |
30.49 |
50 |
(Note: 1 lakh = 100,000; 1 cr. = 1 crore = 100 lakh)
The above figures tell their own story. LIC’s expenses came down from over 15 per cent (RER) to just 6.09 per cent, and the overall expenditure ratio (OER) came down from 27.3 per cent to 20.53 per cent. The dividend paid to the Government on a capital of just Rs 5 crore soared to Rs 198.35 crore. The LIC has also paid increasing bonuses to its policy-holders and introduced a number of new plans to suit the growing requirements of the people. When the private insurance companies were doing practically all their business from urban centres, the LIC did almost 50 per cent of its business from/with (?) rural areas of the country. It has a large network of over 2,000 branches, almost 48 per cent being in the rural areas and semi-urban centres.
Out of its huge investments touching Rs one lakh crore, it invests 50 per cent in the state and Central government securities, 25 per cent in semi-Government and public sector, and 10 per cent in the cooperative sector. Its investment in socially-oriented areas such as for housing, roads, rural electrification, municipal underground sewerage schemes, water supply, schools, road transport, and small industrial estates etc exceeds Rs 30,000 crore. Many of these schemes were granted funds at a rate of return far lower than the market rate owing to their social significance; yet it has managed to give a huge dividend of around Rs 200 crore in a single year (1997-98) to the Government of India. It paid an income tax of over Rs 12,500 crore, being the single largest income tax payer in the country.
The GIC, which was formed in 1973 and has four flag-ship companies, has done more or less equally well, although for paucity of space we are not giving the relevant data here. GIC is able to offer risk covers as varied as to a donkey of a rural household to the satellites launched by ISRO. By its astute management of its reinsurance portfolio, the GIC has been able to save valuable foreign exchange worth Rs 2,000 crore a year.
Thus, in sharp contrast to the dismal and inefficient performance of the insurance companies in the private sector before nationalisation, the public sector performance has been a spectacular and all-round success due to the efforts of the staff, despite the problems created by the bureaucratic approach of the management and the anti-employee stand of the Government of India in dealing with the employees’ problems.
Not that all is well. Problems arise because of the rapid and phenomenal expansion of the business and also because of the large-scale decentralisation of the work among the branches — particularly since 1981. However, they could be overcome by involving the employees and by creating a sense among them of belonging to the organisation. The management of the LIC has recently appointed a special committee to consider ways and means to implement administrative reforms.
The AIIEA, which fought a glorious battle against computerisation in the late sixties, later agreed to a staggered, phase by phase, computerisation of the branch offices, where decentralisation has brought under its purview all work relating to policy-holders — from issue of policies to settlement of claims. As noted above, only about three per cent of all accumulated claims due remain unpaid at the end of each year. That too due to factors beyond the control of the office, such as lack of current address of policy-holders, court cases, policy documents and discharge vouchers not being received duly signed by the policy-holders, etc. This ratio was as high as 50 per cent to 75 per cent in the private sector just before nationalisation. It is also between 20 per cent and 40 per cent among even the best of British, American and Canadian companies. So the LIC has achieved a world record in claims settlement, which is a hall-mark of its general service to policy-holders.
With the introduction of online (front-end) technology, the service to policy-holders has further improved. At least there is not a single case now where a policy-holder has lost his/her life’s hard-earned savings due to the insurance company going bankrupt, as happens with private sector companies. This has provided security to the millions of policy-holders. The LIC has issued some 11 crore policies which are in force as of now, and for these policy-holders the name of the LIC is synonymous with safety in an environment of complete insecurity.
It is therefore not without significance that when a survey among policy holders was organised by the marketing/public opinion research group MARG at the instance of the Malhotra Committee, the findings reported that some 92 per cent of the policy-holders expressed complete satisfaction with the service given by the LIC and over 50 per cent opposed the move to privatise the industry. If the survey is now repeated after over 30,000 non-banking financial companies (NBFCs) have duped lakhs of people of thousands of crores of rupees, we are sure the percentage would go up to almost 100 per cent. So much for the customer service of private financial institutions!
We have dealt with the performance of the private insurance companies in India at some length above. Now despite their record of dismal performance and totally inefficient functioning, we are being told that the private sector should be allowed entry because that would improve efficiency and service to policy-holders!
Now let us see what has been the performance of private foreign insurance companies abroad.
The USA is the ‘swarga’ of all liberalisers. What has been the record of American insurance companies?
When insurance company failures reached scandalous proportions in that country, the Subcommittee on Oversights and Investigations of the U.S. House of Representatives went into that question. It submitted its report in February in 1990 and the report was aptly titled "Failed Promises". The Subcommittee found that when the "results of these outrageous attitudes breaking point, the officers and directors serving in these companies simply disclaimed responsibility and walked away. Their response was to let others pay and clear up their mess, with no signs of remorse or desire to provide restitution for their scandalous behaviour...
Further: "...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" (how much like our CRB Markets Ltd and other NBFCs and plantation scheme operators!).
The Subcommittee declared that "Unless something drastic is done to strengthen the solvency regulations of insurance companies, the financial rewards of greed, fraud, and incompetence will continue to attract a growing number of people who practice such traits with relish and abandon."
The situation in Japan about which we have been hearing so much is not different. We have recently been reading reports of how the entire banking industry in Japan has been bankrupted and the government of Japan will have to fork out something like $740 billion in order to keep up the credibility of the banking industry. But when the Nissan Mutual Life Insurance Company went bankrupt, neither its parent company nor the Japanese government came to its rescue. The result was that the policy-holders were left to fend for themselves, with their life’s savings gone to the dogs.
Reportedly, in the USA, as many as 60 insurance companies go bankrupt every year, and this in the USA, where the insurance regulatory mechanism is the strictest of all, where each state has a separate Insurance Commissioner.
Vijay Salunke, a veteran writer and journalist writing in the Daily Sakal (26/12/97) reported that in the massive earthquake that rocked California, USA, the damage was so huge that insurance companies received claims worth $200 billion. And what did they do? They simply declared bankruptcy and vanished out of existence! As against this, when there was a massive earthquake in the Latur-Osmanabad area of Maharashtra in September 1993, LIC/GIC set up special cells to settle the claims; their personnel went from house to house to pay claims. So also after the Bombay riots. And now GIC alone is paying claims upto Rs 1,200 crore to meet claims from the after-effets of cyclonic storms in Gujarat.
In the U.K., the approximately 500-year-old, biggest, insurer — the venerable "Lloyds Underwriters" — went out of business, and their shareholders have gone to court to seek compensation.
The Economic Times (12/8/98) reported that the South Korean government suspended the operations of four insurance companies. Those from insurance circles expressed surprise that when actually 15 companies were sick, why were only these four suspended. The practice is as bad or worse in Indonesia and Thailand. Times of India reported (3/8/98, "Insolvency threatens Asian insurers") that as many as 39 insurance companies in Indonesia out of 150 were reporting inability to meet liabilities even before the present crisis. Since then the situation has worsened. The article said that in 1996 about 850 insurance companies in Asia were unable to meet liabilities. Now the situation must have become worse.
In our own country, the Reserve Bank of India, the well-established regulator of the banking industry, could not prevent the Harshad Mehta-led security scam involving Rs 7,000 to Rs 8,000 crore; let it be noted that 70 per cent of the amount involved was from four foreign private banks. When the Parliamentary committee unanimously recommended cancellation of the banking license of these four foreign private banks, the RBI did not do so! Instead, they put a fine on each of them of just Rs 100 crore and let them off. So much for regulation in banking!
Later when some 30,000 NBFCs looted crores of common people of their hard-earned savings, the RBI again was a helpless spectator. Now the Chief of the Insurance Regulatory Authority, N. Rangachari, wants us to believe that he will be very strict about regulations, unlike under pre-nationalisation state of affairs!
So, when the private sector in banking and insurance is failing everywhere, our leaders have the temerity to advocate privatisation of these sectors in India. Of course, they will not be paying the price of their policy. It is the people who will be required to pay the heavy cost of this folly!
The speculative capital of international monopolists, imperialist, is on the prowl. They were advocating to us the path trodden by South Korea, Indonesia, Thailand and other ‘tigers’, who have now been reduced to the state of lambs by them. To get out of their crisis, they have had to take IMF loans. But for what? So that the huge loans lent to these countries by international monopoly capital are secure for it. So the IMF loans were not intended to help the economies of the countries involved! The money lent by the IMF went back into the pockets of the speculative capitalists such as George Soros.
The international monopoly capitalists are now on the look-out to buy the assets of the companies dirt-cheap, and their mouths are watering at the excellent prospects that companies of these countries offer. Look at the following news report from the Times of India (12/8/98): "Munich: German insurer Allianz AG said on Tuesday that it was studying markets in Asia for potential acquisitions.... An Allianz spokesperson said that the group wanted to expand further in Asia through acquisitions and that there were attractive possibilities arising out of the Asian financial crisis."
The insurance employees’ movement has so far saved the financial giants — LIC and GIC — being reduced to such a state and being swallowed by the imperialist insurers, who are hungry to acquire dominance in the Indian financial system.
— B.J. Kerkar,
Jt. Secretary,
Western Zone Insurance Employees’ Association
(Affiliated to AIIEA)