Life Insurance Corporation of India: Coping with Uncertainty

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LIFE INSURANCE CORPORATION OF INDIA :
COPING WITH UNCERTAINTY

INTRODUCTION TO CASE
The year 1996 was a significant one for the pension fund business in India. Till then, by virtue of Section 30 of LIC Act, 1956, only the Life Insurance Corporation (LIC) was authorized to transact life insurance business and the pension business was treated as a part of life insurance business according to the provision of the Insurance Act, 1938. In 1996 Government of India made a momentous decision to allow the Unit Trust of India (UTI) to set up a pension fund business. Following the policy of 1996, the announcement allowing UTI to operate the pension fund business made by the finance minister of India when he delivered his budget speech for the year 1997-98. The budget envisaged the separation of pension fund business from life insurance business and allowed UTI to operate a full-fledged pension fund which would compare with LIC’s pension schemes. Simultaneously, the government also granted permission to LIC to set up and promote joint venture to the pension business. Opening up of the pension business for competition was just a forerunner to opening up of the entire insurance sector. The insurance sector encompasses general and life insurance, and pension fund business. The insurance sector reform envisaged opening up of the insurance sector to private players which had till now the monopoly of public sector corporations. Since the liberalization exercise in 1991, the government of India had taken a number of initiatives in the financial sector. New policies were formulated covering the banking sector and the capital markets with the objective of creating a more efficient and competitive financial system. Insurance was an important part of the overall financial system and reforms were considered necessary in the insurance sector too. Therefore, under the chairmanship of former governor of the Reserve Bank of India, R.N. Malhotra, the government of India appointed a committee for suggesting suitable reforms in the insurance sector. Important recommendations of the committee were:

* The private sector be allowed to enter the insurance business, though no single company will be allowed to transact both life and general insurance business. * The new entrants would have to write a specified portion of their business in rural areas. * The minimum paid-up capital of new entrant would be Rs.1bn. However, a lower capital requirement can be prescribed for state-level co-operative institutions taking up life insurance business. * Foreign insurance companies would be permitted to enter on a selective basis and would be required to float an Indian company for the purpose, preferably as a joint venture with an India partner. * Regularity environment if in the post-deregulation insurance industry will look as follows. * The office of the controller of the insurance will be given its full functions as stipulated under the original insurance Act. * The legislation and government notification exempting LIC from several provisions of the insurance Act will be withdrawn.

With the opening up of the insurance sector LIC would lose its monopoly status to conduct life insurance business in the country. Further, to ensure a level playing field for the private players the government may also withdraw some of the special privileges of LIC which it enjoyed because its public corporation status. Given the huge size and relatively small penetration of the insurance concept, foreign insurance companies were viewing the Indian market as an attractive proposition. Many had expressed interest in entering the insurance business in India and had formed joint ventures with Indian entities to start the insurance business as soon as the sector is fully opened up(see Appendix 1 for a list of joint ventures in life insurance business with brief descriptions of foreign joint ventures). The coming years were also significant for LIC as there was...
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