Blog by Mr. Venkatkrishnan, C.A.

Source: Venkat’s Expressions- Blog by Mr. Venkatkrishnan, C.A. on Management issues

LIC breach of Good Faith!  

(Blog-post, dated 06.03.2012)

Any early student of commerce would tell you that a contract of insurance is one of “Uberrimae Fidei” a latin term to indicate “Utmost Good Faith”. That being the case, the actions of the government in the handling and the management of the Life Insurance Corporation is anything but that. The genesis of the Life Insurance Corporation was the insurance fraud by owners of private insurance companies in response to which the Life Insurance Corporation of India was created by consolidating the life insurance business of 245 private life insurers and other entities offering life insurance services.

The actions of the government over the last couple of years have done very little to justify the stand and looks that the governance deficit in the management of the corporation has raised very serious questions.

To start with the largest insurance company has been functioning without a full time Chairman for over a year now.  If that is the importance the government bestows on the “Superbrand”, then it speaks very poorly of the discharge of its responsibilities.

The business of Life Insurance is primarily a fiduciary responsibility and the fact it is controlled or guaranteed by the government does not make it any less onerous. Unfortunately the government appears to have violated this cardinal principle and has begun to use the access to the funds a bit too liberally to make investments in PSU more particularly in banks. It is no wonder that the Insurance Regulator has raised concerns about the overexposure to PSUs. http://www.business-standard.com/india/news/lics-growing-exposure-in-psuscauseconcern-for-irda/466851/

Now the other concern about the investments is the recent fiasco in the disinvestment of ONGC shares.  There are two disturbing issues about the bids by LIC.  First news reports suggest that LIC had been accumulating shares in ONGC much before.  Would that be principles of transparency and good governance? http://www.business-standard.com/india/news/lic-stocked-upongc-before-govt-stake-auction/466890/  From an investment perspective, it appears that LIC was the only institutional investor in the bidding process!  Did LIC miss to see something serious that the other investment manager saw? The investment value has already eroded by nearly 25%.  If this had happened in any other private insurance company the roof would have come down by now.

The sequences of events and happenings have some stark resemblance to what happened to the UTI in the early nineties. It appears that we have not learnt our lessons from the past.