Indian History: Time to turn the
clock back-and open up insurance
Fifty years ago, India had
a bustling, if somewhat chaotic, entirely private insurance industry. The year
after Independence, 209 life Insurance companies were doing business worth
Rs712.76 crore (which grew to an amazing Rs 295,758 crore in 1995-96). Foreign
insurers had a large market share 40 per cent for general insurance but there
were also plenty of Indian companies, many promoted by business houses like the
Tatas and Dalmias. The first Indian-owned life insurance company, the Bombay
Mutual Life Assurance Society, was set up in 1870 by six friends. It Insured
Indian lives at the normal rates instead of charging a premium of 15 to 20
percent as foreign insurers did. Its general insurance counterpart, Indian
Mercantile Insurance Company Ltd., opened in Bombay in
1907.
A plethora of
insufficiently regulated players was a sure recipe for abuse, especially
because there was no separation between business houses and the insurance
companies they promoted. The Insurance Act, 1938, introduced state
controls on insurance, including mandatory investments in approved securities,
but regulation remained ineffective. In 1949, Purshottamdas Thakurdas, chairman
of the Oriental Assurance Company, admitted: "We cannot deny that, today,
there is a tendency on the part of insurance companies in general to make
illicit gains. Can we overlook the cutthroat competition for acquiring
business? And still worse is the dishonest practice of adjusting of
accounts." After a 1951 inquiry, the government was dismayed that
companies had high expense and premium rates, were speculating in shares, and
giving loans regardless of security. No wonder that between 1945 and 1955, 25
insurers went into liquidation and 25 transferred their business to other
companies.
This reckless record
stoked the pro-nationalization fires. The 1956 life insurance Nationalization
was a top-secret intrigue; for fear that unscrupulous insurers would siphon
funds off if warned. The government resolved to first take over the management
of life insurance companies by ordinance, then their ownership. The then
finance minister C.D. Deshmukh later wrote: 'Seth Ramakrishna Dalmia’s
extraction of Rs.225 crore (misappropriation by the Bharat Insurance Company)
was a heaven-sent opportunity. We were ready to nationalize, with every
detail worked out." On 19 January 1956, the news was announced on the
radio, though even the director- general of AIR was not shown the speech. The
next morning, at 9 am, while executives were frantically seeking details over
the trunk telephone, says Deshmukh in his autobiography, our officers walked
into the respective insurance offices, showed their authority and then took
over the business. I believe this will be regarded as one of the best kept
secrets of the Government of India in all times to come." The
ordinance transferred control of 245 insurers to the government. LIC, established
eight months later, took over their ownership. General Insurance had its turn
in 1972, when 107 insurers were amalgamated into four companies headquartered
in the four metros, with GIC as a holding company. Nationalization brought
some benefits. Insurance spread from an urban-oriented, high-end business to a
mass one. Today, 48 per cent Of LIC's new business is rural. Net premium income
in general insurance grew from Rs222 crore in 1973 to Rs 5,956 crore in
1995- 96. Yet, rigid controls hamper operational flexibility and initiative so
both customers service and work culture today are dismal. The frontier spirit
of the early insurers has been lost. Insurance companies have also been timid
in managing their investment portfolios. Competition between the four GIC
subsidiaries remains illusory. If Nationalization ever had a purpose, it has
been served. It's now time to turn back the clock in some respects, and open up
the sector again. The government already intends to insist on large minimum
capital requirements, a strong regulator, and a healthy distance between
insurers and industry.
