COM.GURUMURTHY'S CALL TO DEFEND PUBLIC SECTOR GENERAL INSURANCE COMPANIES

AIIEA Standing Committee Secretary(General Insurance) Com.Gurumurthy was the key speaker at the state level study camp organized by the Kerala State General Insurance Employees Union(KSGIEU) at CSI Retreat Center, Kottayam, recently. The topic was “Public Sector General Insurance and Two Decades of Free Market.”

In his one and a half hour presentation Com.Gurumurthy dealt with various aspects of general insurance industry in India, beginning with pre and post nationalization periods. Prior to nationalization there were 106 general insurance companies and with the amalgamation, GIC and four subsidiaries were formed, he said.

With the introduction of liberalization policies in 1991, he said, a series of measures to open up the insurance industry began. The R N Malhotra Committee constituted in 1993, in its report recommended reduction of the government stake in the insurance companies to 50 per cent, through disinvestment. He said the struggle spear-headed by the AIIEA could delay the government efforts to open up the sector, for a decade.

Com.Gurumurthy observed that with the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favour of market-driven competition. This shift, he said, has brought about major challenges to public sector general insurance industry. The government was giving in to the incessant demands of foreign capital. The justification for opening up the insurance sector was the lack of penetration of insurance and non-availability of new products.

Analysing growth of general insurance sector, he said, general insurance penetration has stagnated at 0.60 per cent. As for the improvement of penetration in life insurance from 1.60 per cent to 4 per cent, he felt that it was due to general buoyancy in the economy.

With the opening up of the insurance sector, Com.Gurumurthy pointed out that lots of unhealthy developments started afflicting the sector. The de-tariffing resulted in “massive under-cutting” in the fire portfolio, to the extent of about 80 per cent. The delay in revision of motor tariff and “selective underwriting” by private players also were challenges faced by the public sector general insurance companies, he said. In the post de-tariffed environment, he said, the intense competition would drive down insurance rates, a development which could ultimately impact solvency margins.

Com.Gurumurthy felt that on the regulatory side, IRDA should take a professional approach in the matter of outstanding issues concerning solvency regulations, further liberalizing of investment rules as well as the enforcement of price tariffs in the general insurance sector. In the liberalized environment, he cautioned against potentially higher incidences of unhealthy market practices.

Com.Gurumurthy expressed satisfaction at the performance of public sector general insurance companies and said New India Assurance Company’s loss of Rs.421 crores, during the last financial year, was due to technical reasons. Natural disasters have adversely impacted the performance of the company having direct offices in Japan, Australia and New Zeland. He deplored the deliberate attempt to show the public sector in bad light, in the context of the developments in the New India. He said the performance of the four companies in the competitive environment was extremely good. The solvency margin of the public sector companies was satisfactory. He said the public sector companies were financially sound, with investment value totaling Rs.1 Lakh crore.

Over the years, the public sector general insurance industry might be making underwriting losses but the companies have huge investment income by which they have been able to cover up those losses and have been able to show reasonably sound balance sheet over the years, Com.Gurumurthy said.

According to Com.Gurumurthy, as India continues to revamp its infrastructure, the flow-on effects will ensure ongoing growth of commercial insurance. He suggested drastic alteration in the process-oriented approach in the matter of claim settlement through motor third party adalalth. The public sector insurance companies have adopted upgraded insurance solutions system, but that has also created technical snags and the expected speedy delivery of products has not materialized, he said.

He stressed the need to have a proper assessment of the asset base of the public sector general insurance companies, since the balance sheets of these companies reflect only the” depreciated value of buildings situated in metros and major cities.” Moreover, as the shares of these companies are not listed in the stock exchanges, there is “considerable hidden value” for these companies as the same is not reflected in the books of accounts. Excess amounts paid to tax authorities, in some parts of the country, and now being challenged in the tax tribunal courts, would also help some companies, if the cases are favourably settled, he felt.

He said, the four public sector general insurance companies jointly set up Third Party Administrator to check excess mediclaim bills by private hospitals. This move, which is expected to help insurance companies to control both health insurance premium and claims, he observed.

Com.Gurumurthy expressed serious concern about the GIPSA management’s attitude towards new recruitment of staff in the public sector companies. He said several thousands of employees had left the industry and lack of recruitment was seriously affecting the service at the branch offices. He said the Standing Committee meeting proposed to the held in September 2011, at New Delhi, would discuss the matter for further action.

He said, the AIIEA has demanded the consolidation of the public sector through merger of the four companies and the benefits of such a move had been explained to the government and a campaign among the public was also under taken on the issue.

In the context of opposition to the LIC and the Insurance Laws (Amendment) Bill 2008, AIIEA has opposed the government move and has placed its views effectively before the Parliamentary Committee that is scrutinizing the Bill, he said.

Growing Dimensions of Money Laundering

Faced with the rising twin threats of money laundering and terrorism, financed by illegally amassed wealth, India recently sought increased mutual assistance among countries in areas like extradition of those involved in such criminal acts. Inaugurating the 14^th annual meeting of the Asia-Pacific Group(APG) on Money Laundering at Kochi recently, Union Finance Minister Pranab Mukherjee said laundered money has become an important source of funding of international terrorism, and this menace cannot be contained by any nation along.

Estimates have it that the quantum of money generated from criminal activities and laundered throughout the world ran into several billions of dollars—up to as much as two to five per cent of the global GDP. Beneficiaries of money laundering are acquiring enough muscle to threaten political stability worldwide. Their cross border linkages demand collective efforts in dealing with money laundering ruthlessly, the minister said.

Annual Report of the Financial Intelligent Unit of India explains money laundering as “the process by which criminals disguise the illegal origin of their wealth to avoid suspicion of law enforcement authorities and to wipe the trial of incriminating evidence.” Money laundering impacts a nation’s economy as ‘dirty money’ moves rapidly across borders to obscure the audit trail and affects interest and exchange rates.

Financial Intelligence Unit – India (FIU-IND) is the central national agency of India responsible for receiving, processing and analyzing and disseminating information of suspect financial transactions. FIU-IND is also responsible for coordinating and strengthening efforts of national and international intelligence, investigation and enforcement agencies in combating money laundering and related crimes.

The Prevention of Money Laundering Act 2002(PMLA) forms the core of the legal frame work put in place by India to combat money laundering. PMLA and the Rules notified there under came into force with effect from July 1 2005. The PMLA and rules notified there-under impose obligation on banking companies, financial institutions and intermediaries to verify identity of clients, maintain records and furnish information to FIU-IND. PMLA defines money laundering offence and provides for freezing, seizure and confiscation of the proceeds of crime.

Section2(1)(g) of PMLA Rules defines suspicious transaction as a transaction whether or not made in cash which, a person acting in good faith: (a) gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or (b)appears to be made in circumstance of unusual or unjustified complexity; or (c) appears to have no economic rationale or bona fide purpose; or (d) gives rise to a reasonable ground of suspicion that it may involve financing of the activities relating to terrorism.

At the APG meet here, Mr.Mukherjee disclosed that India was in the process of suitably amending the PMLA to make those legislations more effective in dealing with money laundering and terror funding. These amendments will be in line with the key recommendations of the Financial Action Task Force(FATF) formed by several countries way back in 1989 to evolve a global policy response to the threats posed by money laundering.

The Asia/Pacific Group on Money Laundering(APG) is an international organization consisting of forty members and a number of international and regional observers including United Nationals, IMF, Asian Development Bank and Financial Action Task Force(FATF), whose secretariat is located in the OECD headquarters in Paris(http://www.apgml.org/). All APG members are committed to effectively implementing the FATF’s international standards for anti-money laundering and combating the financing of terrorism, referred to as the 40+9 Recommendations. Part of this commitment includes implementing measures against terrorists listed by the United Nations in the “UNSC 1267 Committee Consolidated List.”

The APG has a number of functions including:(1)Assess APG members’ compliance with the global AML/CFT standards through mutual evaluations (2)Co-ordinate technical assistance and training with donor agencies and APG members/observers to improve compliance with the AM L/CFT standards(3)Co-operate with the international AML/CFT network(4)Conduct research into money laundering and terrorist financing methods, trends, risks and vulnerabilities(5)Contribute to the global AML/CFT policy development by active membership of FATF.

The engagements at the APG conference included meetings of Working Group, Group dealing with Implementation Issues, APG Steering Group and mutual evaluation meeting. Delegates discussed and adopted mutual evaluation reports. As part of the FATF’s policy of protecting the international financial system from money laundering and terrorist financing, working groups took a number of important steps including publishing reports on(1) Organised money laundering (2)Terrorism Financing (3) Maritime Piracy (4) Human Trafficking.

During the current session of the APG, six nations were subjected to mutual evaluation. The countries were Afghanistan, Nepal, Papua New Guinea, the Maldives, Marshal Islands and Lao PDR. Mutual evaluation progress reports of 30 members were also reviewed. India underwent the process last year and fared well enough to secure admission to the FATF. The APG has a 49 point evaluation system, which the member-states have to undergo. Those found not complying with this regime will be assisted in bringing out amendments to their legal system and adopting international standards of security against money laundering and funding of terrorist activities according to the APG briefing.

Repeated non-compliance can lead to blacklisting of the member-state, which will affect foreign investments to that nation. One of the key recommendations was the formation of Finance Intelligence Units, which will collect information regarding financial transactions and look into suspicious deals. India has already set up the FIU and this is working effectively according to K.Jose Cyriac, APG co-chair and Secretary to the Union Government. “The deliberations in the meeting were very fruitful and ended with reiteration by all members and observers of their commitment to deter money laundering and terrorist financing,” he said.

The APG meet discussed a suggestion that crime committed by the money transactions should also be brought under the purview of the FIU. The suggestion was to provide information from police stations to the FIU so that details of criminals were with it. This would enhance the value of information regarding suspicious transactions of money, it was suggested. Ever since India passed legislations to check money laundering, as per the norms of the FATF standards, the number of cases registered shot up from 50 to 1300.