It is a critical for the government, who is a financier, policy maker, service provider, regulator and the purchaser of insurance, to work on appropriate policies, and governance structures that provide clarity and balance.
The government made an announcement on 1 February, 2018 proposing merger of three of its PSU General Insurers – National Insurance (NIC), United India Insurance (UII) and Oriental Insurance (OIC) Insurance companies into a single entity prior to being listed on Indian bourses. This was called-off in July 2020. During the Union Budget presentation on 1 February, 2021, another proposal was made to privatise one PSU General Insurer in 2021-22. The outcome is still awaited. Meanwhile, the four PSU General Insurers – New India Assurance (NIA), UII, OIC, and NIC – have lost more than 800 basis points (bps) in market share in last five years to their private counterparts. The PSU General Insurers have also been suffering underwriting losses (as at 31 March, 2023, OIC lost Rs 7477 crore, NIC lost Rs 6032 crore, NIA lost Rs 5377 crore, and the UIC lost Rs 6285 crore).The solvency ratios of the three loss-making PSU Insurers are in the negative zones’ vis a vis the regulatorily required solvency margin: As at 31 March, 2023, OIC stood at (-) 0.96 per cent, NIC stood at (-) 0.29 per cent, and UII stood at (-) 0.29 per cent. The regulations allow a solvency ratio of 1.5.
The government, in January 2017 had approved the listing of country’s four PSU general insurance companies and the lone state-run reinsurer GIC Re to ensure higher levels of transparency and accountability and to gradually bring down the government holding in these companies to 75% from 100%, after 2015 insurance amendments allowed government stakes to be brought down to 51%.The divestment process started with GIC Re and NIA in the late 2017 with not so encouraging results. GIC Re’s 2017 initial public offering (IPO) had to scramble for a little over half subscription coming from Life Insurance Corporation of India (LIC). Its market capitalisation has seen significant erosion since then. NIA saw its 2017 IPO receiving a nonchalant market response, with LIC subscription providing the life line. Its market capitalisation has seen quite a decline since.
The sole PSU Life insurer, LIC is under the supervisory oversight of the Insurance Regulatory and Development Authority of India (IRDAI) but is governed by the LIC Act of 1956 which enables the state-owned insurer to obtain a special dispensation in several areas including higher stakes in companies beyond the limit set by the IRDAI. The IPO of the LIC, in early 2022, got listed at Rs 873, a discount of 8 per cent to the IPO price. It is now trading down more than 30 per cent from the listing price. Its share price implies far lower valuations than its private sector rivals in terms of the usual metric of embedded value, which is the present value of expected future profits;it’s APE (Annual Premium Equivalent) is well below the leading private peers. There are reasons galore. One that sticks out is that it is looked at as government’s investor of last resort. Hence, the comment, “LIC has become a de facto sovereign wealth fund, though not by design”.
There can be a valid debate whether PSU insurance firms are indeed the Systemically Important Financial Institutions (SIFIs) for the Indian market. The Financial Stability Board (FSB) refers to SIFIs as institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity”. But the fact is that the IRDAI had earlier identified LIC, GIC Re and NIA as the Domestic Systemically Important Insurers (D-SIIs – which means their distress or failure would cause a significant dislocation in the domestic financial system). They would be subjected to enhanced regulatory supervision to deal with the systemic risks and moral hazard issues. These entities have been asked to: Raise the level of corporate governance, and; Identify all relevant risks and promote a sound risk management culture. This sounds oxymoron since the PSU insurers have been a recipient of governance processes instituted by the administrative ministry of the government from the very beginning.
When the Reserve Bank of India (RBI) Governor has recently asked the directors of public-sector banks (PSBs) to further strengthen their governance and assurance functions, such as risk management and internal audits, this resonates rather well with the wider body of the stakeholders as being proactive governance. Perhaps, an overtly closer regulatory oversight of PSU Insurers would have hustled them repair their balance sheets, and improve their market profiles.
After fifty years of insurance nationalisation, government companies cannot still be seen as an enterprise driven by social purpose considerations – and not necessarily policyholders’ interests. It is important, therefore, that all the PSU insurers doing life, general, crop, trade-credit, and reinsurance are enabled a professional set-up under the umbrella of a fully independent, autonomous and empowered holding company, entrusted with the governance and oversight of the management of the PSU Insurers. The day-to-day administrative ministry control should cease. The holding company board will independently set all policy standards under the “delegated authority” from the Government of India. The Board will negotiate fresh paradigms and independence for its entities’ accountability to Central Bureau of Investigation (CBI), Comptroller and Auditor General of India (CAG) and Central Vigilance Commission (CVC). There has to be a need for wide-ranging human resource policy changes, in line with the competitive environment and compensations that will include short term variable components, need for better incentivizing and allowing compensations through long term stock options, and an eye for long term succession planning. The holding company board can have sweat equity for running a long-haul project.
The regulatory responsibility to protect market oversight (for sustainable and profitable growth of all entities that is valued by all stakeholders), and an accountability to provide Ease of Doing Insurance Business Framework, finds resonance with all the stakeholders, at all times. Just as poor insurance penetration is a plumbing issue, so is the governance of the PSU insurers. The government has already applied all the tools – merger, divestments and intended privatisation (of one entity, leaving the larger pool). None of these tools seems to be working. It’s time for an autonomous governance, under a professional insurance helmsmanship – from India or overseas -who with their steady hand on the tiller will make ownership appear neutral and make the PSU Insurers into a world-class insurance provider.
The Hon’ble Prime Minister has provided the right context – Idealism and ideology are not enough in economic decision making. Pragmatism and practicability should also be taken into account. The 21stcentury economy mantras of innovation and enterprise will help all, including at least three of India’s long-standing PSUs – LIC, GIC Re and NIA – get their potential converted into true transnational companies. The PSU Insurers’ contribution besides, securing inclusion and helping the national GDP, is essential to increase India’s geo-strategic reach in the new world order, where India’s expanse and utility will only rise. This will be one of the many preparatory levers for 2047.
A former CEO, and recipient of Lifetime Achievement Award at the 24th Asia Insurance Industry Awards, 2020 Singapore, Arun Agarwal has been publishing research papers, and has recently edited and authored (along with others) a book, “Time for Bharat”, which raises educated conversations on public governance, in an encompassing way.