September 20, 2021

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General Insurance PSUs never got the attention of the govt it needed

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Uday Deb
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There was one day strike in the three Public Sector General Insurance companies on Wednesday. A day before Lok Sabha passed the General Insurance Business (Nationalization) Amendment Bill 2021.

The amendment, most importantly, omits section 10B of the original 1972 Act, permitting the govt shade its stakes to any extent it deemed fit below 51%. This, technically put, empowers the govt to forgo and sell its stake to the extent it wishes or even sell them totally to private hands.

The finance minister, however, clearly and categorically assured the house that ‘what govt is trying to do is not privatize but enabling provisions so that govt could bring in public participation’.

Finance minister felt that public participation would raise the finance of the companies to the desired levels, which in turn will help enhance insurance penetration, protect the interests of policy holders in a greater way and also help in further growth of economy.

Insurance remains one of the vital enabling factors in economic growth as also one of the important indicators of social well-being, prosperity and above all safety and security. Unfortunately, insurance sector in our country has never got the required attention and response of the successive govts and it always remained lost somewhere in back seat. The govt response towards the sector’s reforms, growth and consolidation has been casual, slow lukewarm and at times ignorant.

In Nationalization Act 1972 itself the creation of four identical companies, with the basic idea of competition among them within the stringent tariff regime was an ill-conceived and flawed idea which attracted the criticism of experts at that time and all trade unions and associations, since inception, demanded a merger of all the four companies into a single monolithic entity in line with LIC of India. Govt never even gave a serious thought to the idea.

Post opening up the sector with the advent of a regulator, Insurance Regulatory & Development Authority (IRDAI), the regulator often drifted from its mission and did too little to either ‘regulate’ or ‘develop’ the sector. It allowed the companies, private as well as public, to practice unhealthiest of competition with practically no functional control. This unhealthy competition enabled newly formed private players to thrive – as they had no base, thus no expenses and could invest enormously – and made the established PSUs – who had broad net-work and therefore huge management costs – sick to proceed to a slow inevitable death.

There were, in place, IRDAI’s own strict guidelines calling to bring about ‘optimum amount of self-regulation in day-to-day working’ of the industry and there were also provisions ‘to take action where such standards are inadequate or ineffectively enforced’, But that remained on the paper.

In the name of competition, for example, companies were allowed to grant abnormally and ridiculously high discounts of 99.99% as a regular practice over guide rates of premium, till very recently when these discounts have been now caped but this happened only after the PSU companies became almost unsustainable requiring urgent govt intervention in terms of financial assistance.

For years together IRDAI went on either not doing anything to exercise ‘control’ or going on doing the things grossly detrimental to the working of PSU companies. It would never be known whether the regulator did all these deliberately or simply suffered from typical bureaucratic mentality.

In 2018-19 budget govt decided to merge these companies into one entity by 2019-20. The govt appointed consultants to study and recommend precise modalities and procedure of merger. Companies were advised to prepare for the merger and proceed for the formalities needed therefor. Boards of all the companies, accordingly, passed resolutions for the merger and were proceeding ahead with the active preparations in terms of govt detailed guidelines. The merged company was envisaged to become the largest general insurer of the country.

In 2020 govt decided to infuse Rs 12450 Crores in these companies and also raised the authorized share capital of National Insurance to 7500 Crores and of Oriental Insurance and United India Insurance to 5000 Crores each. A further amount of 6950 Crores was committed to be infused in 2020-21 budget as well.

While all these preparations were taking shape, in a sudden U-turn in the middle of 2020-21 the govt decided to abort the merger plan altogether providing no clue at all as to what led to this decision and/or what was the further roadmap for the ailing PSUs.

These uncertainties and lack of any focused direction led these companies to further operational deterioration and crippling financial results year after year. Operating losses continued to soar and the Solvency Margin – as derived for the ratio of liabilities over assets – remained critically lower than the regulator’s stipulated limit of 1.5. During 2019-20 the three companies together posted a large net loss of 7118 Crores as at the end of 2019-20.

During 2021-22 budget the finance minister announced plan to privatize two PSU banks and one PSU general insurer requiring legislative amendments. With the current amendment, however, the govt has armed itself with the power to tweak any or all of the three PSU insurers the way govt may feel suitable.

The logic and equity of the decision privatizing one of the insurers appears beyond any sound comprehension. Why the one will be singled out and how? Whether the other two would follow? What would be, after all, the fate of the two remaining PSU insurers?

The govt, of course, is not expected to go on infusing huge capital year after year to run these insurance companies when they are not able to stand on their feet. But there has to be a definitive strategy and a focused path to proceed to. The govt decided that there would be one to four PSUs in all the ‘strategic sectors’ to be decided by the govt. Insurance sector has since been decided to be a strategic sector. With New India Assurance already being a listed company, with another one to be privatized and with this current amendment to the Nationalization Act of 1972 empowering the govt to reduce its stakes below 51%, which company in general insurance sector is going to be a PSU? Even the LIC of India, the only PSU in life sector, is supposed to go to public with its shares. Does that imply that there will not be any PSU working in insurance sector, a sector termed as ‘strategic’ by the govt itself?

Insurance is a sensitive sector for the economy and the govt has rightly placed in the category of strategic sector. But the intent of the govt towards this is seemingly confusing and non-serious. A merged company coming out of the three with little hand-holding would have definitely come out of crisis and would have proved to be a formidable entity. Not going with that and instead empowering itself shedding its stakes raises serious doubts about the intentions of the govt. Otherwise why there would not be plan for PSU – one each of life and general sectors – despite govt terming insurance one of the strategic sectors?

It has been proved beyond doubt that PSUs, at least in financial sector, have the unquestionable capabilities of combatting any competition and striving well. The State Bank of India in banking sector, the Life Insurance Corporation of India in life insurance sector and the New India Assurance in general insurance sector have proved it decisively. When LIC of India’s survival as a PSU is clearly compromised by the govt, the intent of the govt about PSU general insurers can just be guessed. Nevertheless, the is need of the hour is a clear motive, a smooth roadmap and a definitive time- line. We still have the time for this.

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Disclaimer

Views expressed above are the author’s own.

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Disclaimer

Views expressed above are the author’s own.

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