By Pradeep S Mehta
Government is expected to encourage competition as it creates efficiency in the economy. Following the 1990s reforms, the insurance sector was deregulated and private sector firms were allowed to operate in India. Until the 1972 law on nationalisation of the insurance business, many private players did operate in India. Then the government nationalised the insurance sector, retained the Life Insurance Corporation of India, and created four other general insurance companies—National, New India, Oriental and United India—under a holding company called General Insurance Corporation of India Ltd. In the year 2000, six months after the setting up of the Insurance Development & Regulatory Authority, the supervisory powers of GIC were whittled down so that each of the four government companies could operate independently rather than function as the four legs of one table.
Now that there is a healthy competition in the sector, thanks to the arrival of many private players, the finance ministry wishes to turn the clock back. In a recent directive, the ministry asked the heads of four government insurance companies not to compete against each other, but to coordinate their activities. This is a retrogressive measure and needs to be reversed.
The ministry has also asked the four government insurance companies to share data on premiums, claims and other expenses with respect to major accounts, before quoting rates. These general insurers have already stopped competing for the group health insurance business. The finance ministry has also asked these companies to avoid discounting premiums especially at the time of renewal of a policy, which would prevent a client from moving to another government insurance company. It is hard to digest the fact that while the corporate affairs ministry is keen on promoting competition through a National Competition Policy (NCP) and the Competition Act, 2002, another branch of the government is encouraging public companies not to compete with each other.
If government insurers abide by the stated orders, they could violate the competition law since such a sharing of information amounts to cartelisation and abuse of dominance. Disclosing data on premiums and disincentivising the lowering of premiums at the time of policy renewal will lead to an anticompetitive practice. There are 24 insurance companies in India, out of which four are government companies, which have a 56% share of the R47,000 crore non-life insurance market. Therefore, collusive behaviour could also lead to abuse of dominance.
In India, there are not many precedents for such a scenario, but experiences of other countries could teach us some lessons. In South Africa, section 4 of the Competition Act prohibits exchange of information but allows sharing for technological, efficiency or other pro-competitive gains. It applies the rule-of-reason test in analysing the latter. Generally, countries have allowed exchange of information between companies if it leads to efficiency in the system. Increased information about the number and size of claims and the characteristics of the claimants can lead to efficiency, by reducing asymmetric information, enabling stronger risk-assessment by insurers, and helping reduce frauds in the insurance sector. But the sharing of confidential information and the like among a few entities might give these entities an unfair advantage over the others who do not have such information, thereby leading to unfair competition.
Two factors need to be considered in analysing whether the sharing of information will lead to cartelisation or not: the type of information being shared and the market structure. Sharing information in an oligopoly tends to increase the odds of cartelisation. OECD has laid out a set of questions that should be addressed before deciding the cartelisation issue. First, does the agreement only cover sharing-of-loss information for risks, where sharing of historical loss data is essential for forecasting future losses? Second, is the participation by insurers voluntary or mandatory? Third, does the agreement allow for the information to be made available to all who request it, on fair, reasonable and non-discriminatory terms? Fourth, will the shared information include information on premiums charged by insurers or on fees payable to intermediaries, and would it permit the calculation of those prices? Will the shared information permit identification of the individual who submitted the information?
In the present case, the finance ministry has directed the companies to share information on premiums, claims and other expenses related to major accounts and not just on losses. Participation of PSU insurers is mandatory, with the ministry warning that any deviation will be taken seriously. The information to be disclosed can only be shared between government insurers, which is unfair and discriminatory to private competitors or policyholders. The directions require the disclosure of information on premiums. The last question cannot be answered given the facts of the present case. On balance, the ministry’s directions will certainly result in cartelisation.
Who should be blamed for such cartelisation? Should it be the finance ministry that has clearly directed that there should be no competition between government insurers over any corporate or group accounts or should it be the government insurers that are just abiding by the ministry’s directions? Businesses are the consumers in this particular case, since they will be charged higher premiums. The Competition Commission of India needs to look into the matter for the welfare of the consumers. Actually, there are many instances where the government prefers public entities over private ones, which goes against the principles of the NCP. For instance, Sebi prefers PSU banks to deposit its surplus funds even if they give lower returns. Similarly, subsidies given to Air India give undue advantage to a public entity. CCI needs to expand its horizons into these areas and introduce relevant guidelines, like the OECD.
The author is Secretary General of CUTS International. With contributions from Anusha Malik Tomar of CUTS