Insurance Nationalization

24/04/2021 1 By indiafreenotes

The Government of India issued an Ordinance on 19 January 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers and also 75 provident societies 245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1 January 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commenced business on 1 January 1973.

The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. But now there are 23 private life insurance companies in India. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company.

The nationalisation of life insurance is an important step in our march towards a socialist society. Its objective will be to serve the individual as well as the state. We require life insurance to spread rapidly all over the country and to bring a measure of security to our people.: Jawaharlal Nehru

The first step towards nationalisation of life insurance was taken on 19 January 1956 by the promulgation of the Life Insurance (Emergency Provisions) Ordinance, 1956. In terms of this Ordinance, the management of the ‘controlled businesses of insurers were vested in the central government. The period between 19 January 1956 and 31 August 1956 was utilised as a period of preparation to facilitate the subsequent integration of the various insurers into a single State-owned  Corporation.

Before nationalisation, the insurance industry was organised into 243 autonomous units, each with its own separate administrative structure of office and field staff, its own separate set of agents and of medical examiners. Their offices concentrated in the large cities and their field of operation was confined to the major urban areas. Out of 145 Indian insurance companies, as many as 103 had their head offices in the four cities of Bombay, Calcutta, Delhi and Madras.

When the Corporation was constituted on 1 September 1956, it integrated into one organisation, the controlled business of 243 different units, Indian and foreign, which were engaged in the transaction of life insurance business in India.

The total assets of the above 243 units as on 31 August 1956 were about Rs 4,110 million and the total number of policies in force was over five million assuring a total sum of more than Rs 12,500 million. The total number of salaried employees was nearly 27,000. These figures give a broad idea of the magnitude of the problem involved in setting up an integrated structure.

When parliament set up LIC as a monopolistic public undertaking, it was argued and believed that elimination of competition and the malpractice that competition has given rise to, would lead to:

a) Better and more economical management of the Business of life insurance.

b) Reduction in administrative expenses.

c) Improvement in the quality of service.

d) Increase in volume of business.

e) Maximisation of social advantages that insurance can provide through higher returns on investments of life fund, consistent with safety and liquidity of the invested funds.

The Corporation had an Executive Committee consisting of the Chairman, two Managing Directors and two other Members of the Corporation. There was also an Investment Committee consisting of the Chairman, a Functional Director, and five other persons, to advise the corporation in matters referred to it relating to the investment of its funds.

By the end of 1955, life insurance touched only a fringe of the urban population. The immense benefits of modern concepts of life insurance remained largely unknown to the large sections of the people and thus the country did not derive full benefit from the system. The shortcomings noticed in the insurance business were due to the unscrupulous business practices of some insurance business magnates. Also, a large number of foreign insurers charged a much higher premium compared to the Indian insurers, thus catering to only the higher income groups. It is believed that insurance is a type of business that ought never to fail if it is properly run. But it was found that during the decade 1945-1955, as many as 25 life insurance companies went into liquidation and another 25 had so frittered away their resources that their business had to be transferred to other companies at a loss to the policyholders’ savings. Hence, effective mobilisation of people’s savings was given as one of the major reasons for nationalisation as a nation’s savings are the prime mover of its economic development.