General Insurance Business (Nationalisation) Amendment Bill, 2021

In News

Recently, the Lok Sabha passed a Bill to amend public sector general insurance law.

About

• The Bill seeks to amend the General Insurance Business (Nationalisation) Act, 1972.  
• The Bill seeks to provide for a greater private sector participation in the public sector insurance companies regulated under the Act.
• It is aimed at generating required resources from the Indian markets so that public sector general insurers can design innovative products.
• It will allow the government to privatize state-run general insurance companies.

General Insurance Business (Nationalisation) Act, 1972

• The Act was enacted to nationalise all private companies undertaking general insurance business in India.  
• The 1972 Act set up the General Insurance Corporation of India (GIC).  
• The businesses of the companies nationalised under the Act were restructured in four subsidiary companies of GIC: 
  • National Insurance, 
  • New India Assurance, 
  • Oriental Insurance, and 
  • United India Insurance.  
• The Act was subsequently amended in 2002 to transfer the control of these four subsidiary companies from GIC to the central government, thereby making them independent companies. 
• Since 2000, GIC exclusively undertakes reinsurance business.

Main Provisions of the Bill

• Government shareholding threshold: The Act requires that shareholding of the central government in the specified insurers (the above five companies) must be at least 51%.  The Bill removes this provision.
• Change in definition of general insurance business: The Act defines general insurance business as fire, marine or miscellaneous insurance business.  It excludes capital redemption and annuity from certain businesses from the definition.  Capital redemption insurance involves payment of a sum of money on a specific date by the insurer after the beneficiary pays premiums periodically. 
  • Under annuity certain insurance, the insurer pays the beneficiary over a period of time. The Bill removes this definition and instead, refers to the definition provided by the Insurance Act, 1938. Under the Insurance Act capital redemption and annuity certain are included within general insurance business.
• Transfer of control from the government: The Bill provides that the Act will not apply to the specified insurers from the date on which the central government relinquishes control of the insurer. Control means: 
  • the power to appoint a majority of directors of a specified insurer, or 
  • to have power over its management or policy decisions.
• Transfer of Power: The Act empowers the central government to notify the terms and conditions of service of employees of the specified insurers. The Bill provides that schemes formulated by the central government in this regard will be deemed to have been adopted by the insurer. The board of directors of the insurer may change these schemes or frame new policies. Further, powers of the central government under such schemes (framed under the Act) will be transferred to the board of directors of the insurer.
• Liabilities of directors:  The Bill specifies that a director of a specified insurer, who is not a whole-time director, will be held liable only for certain acts.  These include acts which have been committed: 
  • with his knowledge, attributable through board processes, and 
  • with his consent or connivance or where he had not acted diligently.

Significance of Bill

• The Bill will bring in more private capital in the general insurance business.
• Improve the reach of general Insurance to make more products available to customers.
• The move is part of the government’s strategy to open up more sectors to private participation and improve efficiency.
• Better insurance penetration and social protection will be provided to insurers.
• Securing the interest of policyholders, which would contribute to faster growth of the Indian economy.

Issues

• India is a welfare oriented country. Government has been the facilitator for a long time. So privatization can bring up some issues:
  • Natural Monopoly: A natural monopoly occurs when the most efficient number of firms in an industry is one. Therefore, in this case, privatisation would just create a private monopoly which might seek to set higher prices which exploit consumers. 
  • Public interest: There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. 
  • Government loses out on potential dividends: Many of the privatised companies are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders.
  • Problem of regulating private monopolies: These need regulating to prevent abuse of monopoly power. Therefore, there is still a need for government regulation, similar to under state ownership.
  • Fragmentation of industries: This may lead to areas where it was unclear who had responsibility. 
  • Short-termism of firms: As well as the government being motivated by short term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short term profits and avoid investing in long term projects. 

Conclusion

• The future looks promising for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business.
• Demographic factors such as growing middle class, young insurable population and growing awareness of the need for protection and retirement planning will support the growth of Indian life insurance.
• The greater private sector participation in the public sector insurance companies could improve efficiency and last mile connectivity.

Source: IE