GENERAL INSURANCE

Why We Need Consolidation of Public Sector Companies

 J Gurumurthy

THIS is an era of acquisitions and mergers. Private companies, including the MNCs, are amalgamating the world over to get more competitive edge. 

For over 33 years, right from the year 1971, when 106 private general insurance companies were taken over by the government of India, trade unions have been demanding that the government must convert them into a single monolithic corporation, akin to the LIC of India.  The success story of the LIC as a monolithic entity in public sector (since 1956) is to now known to everybody.  In 1971, thus, there was already the precedent of a successful LIC, to be followed in general insurance. But the central government decided to have five general insurance companies in public sector (the GIC of India and four subsidiaries), which was certainly not based on the requirements of the situation but on political considerations. Was there really a need for competition among public sector companies, and that too in a tariff regime?  The public sector general insurance industry progressed over a period of time, but the progress would have been tremendous had there been a single corporation.

Now the general insurance industry has been opened up. For over two years now, eight private companies have been in operation. Is there any expansion of business? Whether the size of the ‘cake’ has expanded? The reply is a clear NO! G V Rao, retired CMD of Oriental, raises a pertinent question: “Are the insurers doing enough to raise the level of risk awareness or are they merely content to compete in the markets organised and established?” Then he himself answers the question: “Sooner than later, the private sector players will have to put in place strategies aimed not at winning the existing accounts of the public players but at diversifying their market penetration as a whole.”  He adds, “The private players in future would have to turn their attention to working in the unorganised and under-served markets” (IRDA Journal, December 2003).

But, will it ever happen? The experience says: it will not.   Rather, the private players would continue to skim the profitable segments of the already organised business in urban areas. Perhaps, time has already come for the government of India to evaluate the performance of private companies vis-à-vis their declared objective of opening up of the industry.

Be that as it may, will the government realise, at least now, the need for merging the public sector general insurance companies into a single entity?  Why should the government create a situation that the public sector companies fight for renewals of each other? The government wants each public sector company to perform better than others. But what is happening in this process is the undercutting of premium to retain or wrest a business. Sometimes an uneconomical rate of premium is quoted. While one public sector company wins a business from another in this manner, the other suffers a loss and the resultant effect is a fall in the average premium of the public sector itself. Many a time, such unethical competition among the public sector companies goes to the advantage of private players who grab the business. 

The insurance market has thus been converted into a gambling place. If the public sector companies were made into a single entity, perhaps the total premium of the four public sector companies in the year 2003-04 would have gone up by another 25 per cent. The public sector alone is forced to underwrite the loss making motor third party liability (TPL) insurance. The public sector companies incurred a loss of Rs 1943 crore on this portfolio in just one year (2003-04). The cumulative loss under this portfolio is astronomical. The loss of profitable business in view of undeserved competition among the public sector companies is hampering the subsidisation of social insurance including the motor TPL. 

It is thus clear that the public sector general insurance companies need to be merged immediately when they are still strong, lest a merger becomes inevitable later after the independent public sector companies fail one after another. This does not bid good for the public sector. Nor for the insuring public. And not for economic development either. Progress requires merger of strong public sector companies. Else, it would render public sector companies weak and destroy them. These are the only two options available. Is somebody in the central government listening?

(J Gurumurthy is secretary of the All India Insurance Employees Association’s standing committee on general insurance.)