HVK Archives: Union views opposing opening insu. sector (Part I of IV)
Union views opposing opening insu. sector (Part I of IV) - (no publication)
National Organisation of Insurance workers
()
2 August 1997
Title: Union views opposing opening insurance sector (Part I of IV)
Author: National Organisation of Insurance workers
Publication:
Date: August 2, 1997
Enclosed pleased find herewith a brief Note prepared by us on our views on
"WHY WE OPPOSE OPENING OF INSURANCE SECTOR TO PRIVATE INDIAN CAPITAL AND
MULTI NATIONAL CORPORATIONS". The notes is prepared for the benefit of
M.Ps. and opinion makers in the field to effectively argue or case.
CONCEPT OF INSURANCE INDUSTRY
The important feature of insurance industry is the fact that not much
capital is required to start and develop the business The equity base is
always much smaller than the liabilities undertaken and the resources
generated. The resources accumulation in the form of reserves investment
and other assets are much more enormous than the equity base. The need for
additional capital infusion in response to inflation and consequent
increase in management expenses and other input is very little and
non-existence. The premium income generated and proper husbanding of the
resources take care of this aspect. No special technological knowledge or
specific expertise is required to start the insurance business.
BEFORE NATIONALISATION
Before nationalisation of Life Insurance Sector, around 245 Indian as well
as foreign companies were transacting life business. Despite provisions of
Insurance Act 1938, effective control towards the activities of these
companies could not be achieved. Despite the regulatory measures, the
private insurance industry suffered from all the melodies such as
undercutting of premiums, unscrupulous management, misfeasance,
falsification of reports, questionable investment, siphoning of funds by
company management and other maladies. The most of the ills afflicting the
industry were the off-shoot of unhealthy competition and greed to garner
more profits by jeopardizing the interest of the insuring public.
There was a demand from people to cry halt to this situation and in this
background in the course of discussions, Shri C.D.Deshmukh had revealed
that the Govt. had taken up the investigation of the functioning of the
Life Insurance Industry in the private sector sometimes in 1951. He said
that the industry was not playing the role expected of insurance in the
modern times and efforts at improving the standards are needed. Commenting
on the dismal performance of the insurance companies, he said that there
were extravagant expenses incurred by the private insurers. He said that
the ratio of expenses of management to premium income for Indian insurers
was 27%. Even statutory imposition of expenses limits had failed to check
extravagant expenditure. On the point of policy-servicing he said that
with all this high expenditure, one would expect that policyholders were
well served but here also the record was not good. Post-sale services did
not exist and lapses continued to be high. He also pointed out that there
was a large scale fraudulent-investment resorted to by the various
companies with a view to divert the funds to some other purposes. He said
that the kind of mismanagement and outright frauds indulged in by the
private companies had pushed as many as 25 insurance companies into
liquidation during the decade 1944 to 1954. Among the companies carrying
on the business, as many as 75 were unable to declare any bonus at their
valuations. Besides, Shri Deshmukh said that the insurance companies
remained confined to urban areas and the creamy layers of the insuring
public totally neglecting the ordinary people and the rural area. As
regards settlement of claims, he said that many companies systematically
postponed or avoided payment of claim until of course forced by the legal
means. In 1954, a thousand complaints were received by the Government
alleging delays and non-payment of claims. A number of complaints were
referred to the Controller of Insurance under Sec. 47 A of Insurance Act,
1938. In most of the cases, it was found that the insurance companies were
wrong and there were clear attempts to defraud the insuring public.
Therefore, it was clear that in India the private insurance companies have
failed to live upto the expectations of the insuring public.
WHY NATIONALISATION ?
In this background, the Govt. was forced to nationalise the insurance
sector in the year 1956 to protect the interest of the insuring public. On
the eve of nationalisation of life insurance, Shri Jawaharlal Nehru, the
then prime minister, said " Life insurance becomes one of the major State
undertaking- in India. Its objectives will be to serve the individual as
well as the State. The profit motive goes out of it and the service motive
becomes much more dominant. He said that it was clear that the 245 private
Indian and foreign companies could not succeed in spreading the message of
life insurance to far flung areas. They have not complied with the social
needs and they served only a small segment of the society. They were
clearly motivated by nothing other than the profit motive. Thus the
nationalisation of life insurance was inspired because of a series of
financial irregularities and malpractice, indulged in by the private
insurance companies coupled with the need to spread the message of
insurance far and wide and to garner substantial amount of resources for
the economic development of the country.
Moving the life insurance (emergency provisions) Bill 1956 in the Lokasabha
on 29th February 1956, the Finance Minister stated as follows :-
"Insurance is an essential social service which a welfare state must make
available to its people and the State must assume responsibility for
rendering this service once it cannot be provided in any other manner. So
while it is the failure of the general run of insurance companies to live
up to the high traditions demanded of them that has led the Government to
take this step. I would like to emphasize that nationalisation in this
field is in itself justifiable. With the profit motive eliminated, and the
efficiency of service made the sole. criterion under nationalisation, it
will be possible to spread message of insurance as far wide as possible,
reaching out beyond the more advanced urban areas and into hitherto
neglected, namely, rural areas."
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