Indian History: Time to turn the clock back-and open up insurance.
For two years, around 30 foreign insurers have eagerly explored the nationalized Indian insurance market, preparing to leap in when private participation is allowed. But it seems they have an endless wait before the sector is opened up. That's ironical: in 1947, many of these insurers were firmly established here. BAT subsidiary Eagle Star, for example, opened offices in Calcutta in 1894. By 1921, it was doing business with Brooke Bond and the Birlas. Prudential's first Asia office was opened In India in 1923.
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-nationalisation fires. The 1956 life insurance Nationalisation 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 Rs2, 25 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.
Nationalisation 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 Nationalisation 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. To ensure that history doesn't repeat itself.
For two years, around 30 foreign insurers have eagerly explored the nationalized Indian insurance market, preparing to leap in when private participation is allowed. But it seems they have an endless wait before the sector is opened up. That's ironical: in 1947, many of these insurers were firmly established here. BAT subsidiary Eagle Star, for example, opened offices in Calcutta in 1894. By 1921, it was doing business with Brooke Bond and the Birlas. Prudential's first Asia office was opened In India in 1923.
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-nationalisation fires. The 1956 life insurance Nationalisation 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 Rs2, 25 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.
Nationalisation 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 Nationalisation 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. To ensure that history doesn't repeat itself.