Moneycontrol PRO
Upcoming Event : Register for INTRAZON 3.0 India's Largest Retail Intraday Traders Online Conference

Explained | The General Insurance Business Nationalisation Bill and Opposition concerns

Despite calls by the Opposition for the Bill to be sent to a select committee for scrutiny, it was passed in the Rajya Sabha on August 11 amid high drama

August 12, 2021 / 12:17 PM IST
File image: Parliament

File image: Parliament

The General Insurance Business Nationalisation (Amendment) Bill, 2021, was passed by the Rajya Sabha on August 11 amid an uproar by the Opposition, which wanted the Bill to be sent to a select committee of the Cabinet.

The Bill had been passed by the Lok Sabha on August 2.

The legislation allows the Central government to dilute its stake in state-owned general insurers below 51 percent .

The state-owned insurers are New India Assurance, National Insurance Corporation, General Insurance Corporation of India (GIC Re), Oriental Insurance and United Insurance.

Once the Bill is gazetted and becomes an Act, all the state-owned general insurers can be privatised.

The Opposition is of the view that privatisation will be detrimental to the interests of the public and wanted an expert committee of the Cabinet to study the impact before passing the legislation.

What is the history of the Act?

The General Insurance Business (Nationalisation) Act was passed in 1972. This law sought to nationalise all private general insurance companies in India.

GIC was established and National Insurance, New India Assurance, United India and Oriental Insurance were made its subsidiaries. In 2002, the Act was amended to transfer control of these subsidiary companies from GIC to the Central government.

GIC only writes reinsurance business and hence is called GIC Re. The other public sector general insurers are independent entities.

Merger, listing and privatisation

In February 2018, a proposal to merge United India, Oriental Insurance and National Insurance was proposed by late finance minister Arun Jaitley in his Budget speech.

Here, the idea was that the three entities would be amalgamated and subsequently listed on the stock exchanges. This meant that an exercise to value the firms could be initiated before a merger.

A capital infusion process was undertaken to spruce up the solvency levels of these entities above 1.5 to ensure adequate interest for a proposed IPO at a later stage.

However, in July 2020, the Union Cabinet, in a meeting chaired by Prime Minister Narendra Modi, called off the proposal to merge the three state-owned general insurers.

If merged, the combined entity would have been the largest general insurance company in India. But the Cabinet said it had decided to ‘cease’ the merger process. This was primarily due to rising underwriting losses impacting solvency, and low profits.

The 2021 amendment

The government has amended the law further to remove the requirement of majority shareholding by the Central government in these five entities. This means that these insurers can be privatised.

There are three major changes that have been approved by both Houses of Parliament.

This includes omission of Section 10B of the old Act, to remove the 51 percent government shareholding requirement.

A new section — 24B — has been inserted. It states that the Central government can cease to hold control over a public general insurance company from a given date.

From a governance perspective, the new legislation has also inserted Section 31A, which states that a director who is not a whole-time director will be held responsible for acts of omission and commission by the insurer. This will be for actions that are committed with his knowledge and with his consent.

In Budget 2021, Finance Minister Nirmala Sitharaman had announced that one general insurance company would be privatised in 2021-22. The change in legislation was following this proposal.

What does the Opposition want?

High drama ensued when the Bill was introduced for amendment in the Rajya Sabha on Wednesday. Opposition leaders expressed concern about the legislation being passed without due consideration of its impact on the sector. They wanted a proper discussion on the pros and cons of the Bill rather than passing it in a hurry.

Rajya Sabha member Jairam Ramesh of the Indian National Congress said in a Twitter statement that the Bill was passed in the Rajya Sabha with a large force of security personnel present.

“The Govt refused to send it to a Select Committee — a demand by all Opposition parties including those close to BJP. What happened this evening was worse than atrocious,” he said.

Derek O’Brien of the Trinamool Congress took to Twitter to state that during the passing of the Bill there were more security guards than MPs in the House. He added that the government was trying to ‘bulldoze’ the Bill through Parliament.

Shiv Sena MP Priyanka Chaturvedi stated that male marshals had manhandled women MPs.

Following the ruckus, the Opposition staged a walkout. However, the Bill was passed.

Employees of public sector general insurers are also worried about retrenchment and observed a one-day strike on August 4 against the privatisation legislation.

Sources said that the Opposition is worried about large-scale employee layoffs and short-term investors entering and exiting these entities once the Act comes into force.

“Having Central government backing was essential for the proper functioning of these companies since liquidity was made available on a regular basis. Else, they will collapse and customers/staff will be impacted,” said Balraj Tyagi, an insurance consultant from Delhi, who is a retired PSU insurance industry official.

Tyagi also explained that while private equity entities and others flush with capital are allowed to invest into insurance, their strategy for short-term value creation is not compatible with this business.

General insurance companies in India are currently facing large-scale underwriting losses exceeding 110 percent due to Covid-19 hospitalisation claims.

On the other hand, government sources told Moneycontrol that there is a dire need for capital in the public general insurance sector and hence there was an urgent need to get the legislation passed.

“A few state-run insurers are seeing low solvency levels of 1.3 and below as against the IRDAI requirement of 1.5. Getting private investors would help build a robust capital flow,” said a government official.

IRDAI stipulates a minimum solvency of 1.5, which is roughly the amount of capital/assets against liabilities (insurance claims). This is to ensure that an insurer is able to conduct business even during a heavy claims cycle.

A special dispensation has been given to state-run insurers to ensure that they are able to increase their minimum capital requirements. No deadline has been stipulated for this so far.
M Saraswathy is a business journalist with 10 years of reporting experience. Based in Mumbai, she covers consumer durables, insurance, education and human resources beat for Moneycontrol.
first published: Aug 12, 2021 12:17 pm