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E Composite Premium
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CONTENTS
Page No
1. EDITORIAL 2
2. PERSPECTIVE 3
Secretary General’s Desk
3. COVER STORY 5
The Economic Mayhem
4. BURNING THE CHARIOT OF PROGRESS 9
Com. Gautam Sengupta
5. MEDIA WATCH 13
6. CIRCULAR FILE 19
OF INSURANCE FIELD WORKERS
Vol XXIII Book No 10 October 2008
NEWS BULLETIN
Chief EditorR. Jayprakash
Associate EditorsK. VenkateshS. Sreekumar
EditorsJ. BaburajanM. B. Vinod
Editorial BoardA. GopakumarShaji T ThellyP. K. AjayakumarHari T. Pillai
Please send yoursuggestions, articlesand contribution to
The EditorNews BulletinKalvit BhavanCapital HeightsPlamoodu, PattomTrivandrum - 4ormail [email protected]
The views &
opinion expressed
in the articles need
not necessarily be
that of NFIFWI
A new section - ‘Marketing Tips’ is given in ourwebsite : nfifwi.comPlease make use of it.
We also request contributionof more such tips and presentation from our members.
4
News Bulletin October 2008
EDITORIAL
The Crisis deepens….
‘The Economic melt down’ is continuing and worsening every day. News of banks and financialinstitutions bursting comes in every day. Investors watch with bated breath as stocks plunge to new depths.It was felt that Lehman Brothers may be the first and probably last. But AIG, Merril Lynch followed closely.Then it triggered panic in Europe, Britain, Germany and elsewhere in the world. The much touted bailoutpackage by the US Govt failed to impress the investors. It is generally felt this is morally and ethically notcorrect. The US has long believed in the freedom and ability of the private companies and financial institutions.They Preached that was the only way to a Prosperous tomorrow. When these ‘Economic wizards’ meettheir doom by their own actions, Is it proper to save them by pumping in the Ordinary citizen’s money ? TheOrdinary citizen has no role whatsoever in the decisions of these corporate giants. They are not evenentertained any where in the sprawling offices of these corporates. They are simply forgotten or ignored.They brag only of the new ‘Market System’ that gives only profits. A system that will never fail and onlygrow.
When a Crisis sets in, it is invariably the common man who has to bear the brunt of it. It is hismoney that is wiped off. Adding to that he is forced the bear the burden of the “bailout packages” of theGovt. In the US, every Citizen will have to bear 3 lakhs US dollars for no mistake of theirs. Nothing ofwhich they could even dream of.
It is heartening that the public Voice in the US and eminent economists like Joseph Stiglitz and PaulKrugman come out openly against it. “Those who were responsible for it, should bear it.” That is morallyright.
The hard fact of this disaster is that LIC too, which had for long ardently executing the objectives ofnationalization got entangled in this mire. The proud talk in 1992 was that “LIC lost not a penny in the stockmarket during the Harshad Mehta Scam”. The only institution which stood tall and high with trust was LIC.Is it so now? Is LIC keeping that trust of Investors. The decision makers have to answer that now.
Every time the Sensex falls, the Finance Minister appears in media and assures the investors.Whether a Finance Minister should be doing this for a mere 4% invested in stock market is for the public todecide.
But what should be deplored is the way LIC is forced to buy all the scrips when the market dips.This is actually squandering Public money irresponsibly. Investment is a skilled job to be done by experts togive maximum returns to all the policy holders. They are LIC’s trust and back bone. Is this investment bythe LIC bosses helping that? This should be a matter of concern for all. There should be a re-think on thisinvestment pattern.
We remember the sane prophecy of the respected actuary Sri. Chidambaram who wrote in anarticle for News Bulletin in March 2008 about this.
“It is difficult to believe that unit linked policyholders are aware of the dangers of the market.However much you forewarn them, a great many such forewarning either in unreadable smallprint and enigmatic super fast gibberish from the TV screens”.
“But under the unit linked the whole question of surplus or deficit is decided by the market. Theinsurer has no role in it except perhaps to the extent of what their portfolio manager can do tomaximize returns by a cautiously active sell, buy and hold policy.
“The facts seem to point that the emphasis has moved from security of insurance cover to marketrelated greed. This is certainly not in conformity with the avowed objectives LIC has set foritself.”
“By following suit LIC is getting as much exposed to market risks as other private insurers alsoand if any sinister thing happens to the market every insurer’s reputation as a provider of securitywill be at stake. There seems to be distant rumblings of a gathering market storm. Should LIC be
caught in it?”
5
News Bulletin October 2008
PERSPECTIVE
From the Secretary General’s Desk
The Capitalism theory is failing and the
Countries are heading towards the worst economic
crisis and even bankruptcy. This is a alarming
situation . In short what happened in USA last month
was “PRIVATISATION OF PROFITS AND
NATIONALISATION OF LOSSES”. A well
regulated, balanced system is the need of the hour
and not any “isms”. Americans have lived beyond
their means is the finding now. During the food crisis
President George Bush tried to blame Indians for
eating more. Now the cat is out. We call upon our
Prime Minister and Finance Minister and policy
makers of India and more so, the advocates of
Liberalisation , Privatisation and Globalisation (LPG)
to wake up to the realities and change course in the
best interest of India and it’s citizens. In pursuit of
glamour, service and artificial growth, the world has
got into a rat race where people are forgetting the
basic purpose of life . The great fall from the state
of luxury to a state of starvation and increasing
suicides is intolerable and devastating. Our
government is following the footsteps of the West
and developed countries whereas the US government
has followed our footsteps of the 1956 of
Nationalising private companies. Today the
government proudly and confidently states that our
economy and systems are good. Thanks to the Public
sector banks and Insurance companies which has
helped India. The Government and LIC management
should learn a lesson out of this situation. Today,
Paul Krugman, the noted economist has been
awarded this year’s noble prize. He foresaw the
current economic crisis almost a decade ago and
insistently forewarned the world about it. Nobody
took him seriously and the world is facing the
consequence. Government should stop imitating the
west and instead protect Public sector companies
and the LIC management should stop imitating the
strategies of the Private companies which has
proved to be a disaster- like that of the AIG.
The Economies have crashed, stock markets
have crashed, banks, insurance companies are going
bankrupt, companies are filing for bankruptcy and
all this leading to the loss of wealth and the hard
earned savings of the common man. ULIP’s is not
a life insurance product but a mutual fund product
and investment product where the entire risk is on
the customer.
The NFIFWI had analysed and taken a clear
stand on ULIP’s in 2004. We also took a stand on
various decisions of the management and explained
the predicted consequences which will not be in the
interest of LIC and the nation as a whole. Today
our predictions have come true. Markets have
crashed and the slogans like “10 ka sola bar lo Jola”
is proving to be costly. Where are those managers
who instigated these misselling? The NAV’s of many
LIC and Private companies ULIP’s are in RED.
Better late than never, Comrades, focus on traditional,
conventional Life Insurance products. Let us follow
the basics. Life Insurance marketing is not investment
or Rate of Returns oriented. Life Insurance
marketing is need based marketing convincing people
the need for security and savings for long term goals
and peaceful retired life. Trust is the biggest ASSET
of LIC and we have to protect and promote it at any
cost. Meet agent’s and people and explain to them
why LIC is the best. Ask agents of Private
companies to join LIC. They can work peacefully
and live honorably working with LIC. Policyholders
can be at peace with a LIC policy.
Many FSEs have become agents under
D.Os. Talk to the CLIAs and convince them that
CLIA is harmful to them. Analyse their Individual
business in the last 3 years and in the current year.
CLIA Scheme is harmful to the agent himself , LIC
as a whole and policy holders who will suffer due to
lack of professional service. The good agent should
not be diversified from his business as he will lose
his income and instead he will waste his time and
skill to help somebody else earn. Comrades, follow
the guidelines and ensure good relationships are
maintained with all the agents and that nobody should
be allowed to misguide him or her or diversify them
or poach them. Management should scrap the
disturbing CLIA Scheme without further delay.
6
News Bulletin October 2008
We are pursuing all the pending matters fora concrete solution. Various matters are underprocess and only a satisfactory black and whitecircular will be the final solution. We are patientlyawaiting the solutions. We sincerely hope that themanagement will move fast and settle matters toequip and support us with the necessary and muchneeded spending power and motivating solutions onall our pending matters. We have explained therealities to the management that “ to competeaggressively in a dynamic market motivation andspending power by settlement of all issues,settlement of the injustice, removal of negativefactors like Graded credit, Disincentive for Growthand payment of expenses in the form of expensesare absolutely necessary”. The special rules of 1989which was a MOU should be settled fairly whichshould not affect D.O’s adversely and it should bea MOU.
Let us continue to strengthen our
organization. All divisions should register under the
FACTBOX - Nobel Economics prize
American economist Paul Krugman won the 2008 Nobel prize for economics
for work that helps explain why some countries dominate international trade.
Here are some key facts on the winner and the prize:
• The Royal Swedish Academy of Sciences said the prize recognised Krugman’s
formulation of a new theory to answer questions such as what is driving worldwide
urbanisation.
• Krugman’s work has integrated the previously disparate research fields of international trade and economic
geography, the prize committee said.
• His new theory sheds light on why global trade is dominated by countries that not only have similar
conditions, but also trade in similar products.
• Krugman has criticised the administration of President George W. Bush for policies that he argues led
to the current financial crisis.
• Krugman’s theories have helped explain how self-reinforcing processes of urbanisation and increased
large-scale production, as well as higher real wages and a more diverse supply of goods, can combine
to divide regions into a high-technology urbanized core and a less developed periphery.
• Krugman was born in New York City in 1953 and received a PhD at the Massachusetts Institute of
Technology.
• He has been professor of economics and international affairs at Princeton University, New Jersey, since
2000.
• Krugman has written for publications such as the New York Times and Foreign Affairs and is the author
of 20 books and more than 200 papers in professional journals.
• He has also taught at Yale, MIT and Stanford University.
• His current work centres on economic and currency crises.
Trade union Act as directed at the earliest. Ensure
timely payment of subscription and dues to the
organization to make it financially strong. Continue
to be bold, courageous, patient and vibrant.
LIC is the BEST and the DEVELOPMENT
OFFICERS-TIED AGENCY system are the BEST,
DEPENDABLE Marketing force….
Keep marching ahead strongly and
vigorously. Victory is ours.
National Federation Zindabad…. Zindabad…..
Development officers unity Zindabad……
Yours Comradely
R.Jayprakash
Secretary General
7
News Bulletin October 2008
COCOCOCOCOVER SVER SVER SVER SVER STTTTTORORORORORYYYYY
“ECONOMIC MAYHEM”
A good day for democracyJoseph Stiglitz
(Joseph E. Stiglitz is university professor at Columbia University and recipient of theNobel prize in 2001. He was chief economist at the World Bank at the time of the last global financial crisis.)
A sad day for Wall Street but it may be a glorious
day for democracy. Now the U.S. Congress must
draw up a plan in which the costs are borne by
those who created the problem.
What are we to make of the Congressional rejection
of the Paulson proposal? The politics is simple:
elections are a rare moment of accountability in our
political process and all 435 members of the House
of Representatives are up for re-election in a matter
of weeks. The Bush administration has lost the
confidence of the American people, and so has Wall
Street.
Those who created the problem are now the doctors
offering the prescriptions. A little while ago, we
were told everything was fine. Then, less than six
months ago, we were told that the economy was on
the mend. Now we are told the patient needs a
massive transfusion, but everyone can see that the
patient is suffering from internal bleeding; in
California, the number of foreclosures may already
be outpacing voluntary sales. Yet nothing is being
done to stem the haemorrhaging.
While the president says the economy faces the
risk of economic meltdown, he threatens to veto a
stimulus package which would create jobs - and he
seems particularly adamant about a stimulus
package that includes improved unemployment
benefits. Traditionally, this is done when there is a
threat of an economic downturn; if the downturn
doesn’t materialise, it doesn’t cost anything. And
while the administration and Wall Street promise
this is just a temporary loan, not a bail-out, there
was strong opposition to making the financial industry
pay for any losses. Why would that be, if they are
so sure that there won’t be losses?
The rescue bill left enormous discretion to an
administration on the wane, an administration which
has shown unparalleled incompetence, an
administration which even tried to politicise the
attorney general’s office. Americans worry that
there will be political favourites among the recipients
of the hundreds of billions of dollars; that treasury
secretary Hank Paulson seemed tough on Lehman
but reversed course when his old firm Goldman
Sachs was at risk is hardly reassuring.
Corporate welfarism
If the administration really thought the problems
were as severe as claimed, shouldn’t they have put
forward a bill that was less outrageous? Did they
really think that Americans would swallow giving
them authority to spend $700b, without oversight or
judicial review, in a bill of a few pages? Normally, if
you think there is a crisis, you try to forge a
compromise with those who see the world
differently - workers who worry about the loss of
jobs and homeowners who worry about the risk of
foreclosure.
Americans have lost faith not only in the
administration, but in its economic philosophy: a new
corporate welfarism masquerading behind free
market ideology; another version of trickle-down
economics, where hundreds of billions to Wall Street
that caused the problem was supposed to somehow
trickle down to help ordinary Americans. Trickle-
down hasn’t been working well in America over
the past eight years.
The very assumption that the rescue plan has to
help is suspect. After all, the IMF and U.S. treasury
bail-outs for Wall Street 10 years ago in Korea,
Thailand, Indonesia, Brazil, Russia and Argentina
8
News Bulletin October 2008
didn’t work for those countries, although it did enable
Wall Street to get back most of its money. The
taxpayers in these other poor countries picked up
the tab for the financial markets’ mistakes. This
time, it is American taxpayers who are being asked
to pick up the tab. And that’s the difference. For all
the rhetoric about democracy and good governance,
the citizens in those countries didn’t really get a
chance to vote on the bail-outs. Had they, most
would have suffered the same fortune as Paulson’s.
There is, in fact, a widespread consensus among
economists about what should be done. The
economy is weak and would remain so even with a
good rescue plan. That is why there is a need for a
strong stimulus. The February stimulus package was
badly designed and its anaemic effects offset by
soaring oil and food prices. Given the enormous
increase in the deficit during the past seven years
(from $5.7 billion to over $9 trillion - and that doesn’t
include the bills yet to be paid for the Iraq and
Afghanistan wars) we have to be sure that we get
the biggest bang for the buck. We need increased
unemployment benefits and aid to states and
localities, who otherwise will be forced to cut back
on expenditures, depressing the economy further.
We need more investment in both the public and
private sectors.
The fundamental problem with the financial system
is that there have been large losses. Loans were
made to people who couldn’t repay. They were
made on the basis of collateral whose value was
inflated by a bubble. That bubble has burst and the
collateral is now worth less than the loan. The
experts believe real estate prices have still a way
to fall. This is not a matter of market confidence.
This is a matter of market reality. Paulson would
have us believe otherwise, but the American people
know better. The fact that he and Federal Reserve
chairman Ben Bernanke don’t seem to grasp these
realities undermines confidence that they know what
they are doing.
In environmental economics, there is a basic concept
called the polluter pays principle. It is a matter of
fairness, but also of efficiency. Wall Street has
polluted our economy with toxic mortgages. It should
now pay for the cleanup.
What is so sad about this whole debacle is that is
was predictable. Predictable and avoidable. Perhaps
Paulson and the administration believed that they
could bamboozle Americans into doing whatever
they asked. But Americans had been bamboozled
before - into signing a blank cheque for the Iraq
war.
A sad day for Wall Street, but it may be a glorious
day for democracy. Hopefully Congress will now
devise a plan that is not based on trickle-down
economics. A plan that identifies the real sources of
the problem and does something about them - a real
stimulus to the economy, a real programme to stem
the flood of foreclosures and a transparent
programme for filling the holes in bank balance
sheets. A plan that assures U.S. taxpayers the costs
will be borne by those who created the problem.
Accountability means paying for the full
consequences for one’s actions - and the financial
system has much to account for.
(Courtesy - The Hindu)
“NEWS BULLETIN” thanks
Our Comrades :Our Comrades :Our Comrades :Our Comrades :Our Comrades :
Rajiv Gulati
H.R. Narasimhan
Davinder Singh
Vivek Singh
Himanshu Pandya
Gautam Sen Gupta
T.V. Krishnakumar and other contributors to this issue.
9
News Bulletin October 2008
The failure of the American financial giants
means that the growth prospects of America will
be affected. Many of our industries, especially
in the service sector, depend on markets in the
US and they will be affected, says S.
VENKITARAMANAN
Outsourcing industry, which depends on the level
of demand in the US and Europe, may take a hit.
Recent events have shown that the American
financial system is not as robust as its advocates
claim. In fact, it has been the practice of American
ideologues to canvass in other countries for copying
the American financial system with all its checks
and balances.
The power of stock markets to raise and allocate
capital is their climb to pre-eminence. The “efficient
markets hypothesis” claims that markets are
particularly efficient in discovering process and
determining where capital should flow. It is important
to realise, however, that in recent years the American
financial system has encountered serious problems.
Sparked by sub-prime crisis
Some of these arose as a result of the sub-prime
crisis, followed by fall in house prices and
exploitation by lenders to credulous sub-prime
borrowers by offering them loans at initially low
interest rates and subsequently raising the rates.
What made matters worse was that the sub-prime
loans were packaged, securitised so to say, and
marketed to investment banks.
The investment banks did not, however, have a direct
contact with the borrowers. They did not have a
clue as to how reliable the sub-prime borrower was.
When defaults started, the investment banks realised
they were getting on worthless securities.
What was worse was that the sub-prime related
securities were also invested in by various
international banks, including those in Europe, such
COCOCOCOCOVER SVER SVER SVER SVER STTTTTORORORORORYYYYY
“ECONOMIC MAYHEM”
Global shockwaves from US financial systemS. Venkitaramanan
as UBS. Many of the banks, which had such
exposures, were persuaded to make such investments
because of optimistic rating by various reputed rating
agencies.
The latest episode of failures was led by the collapse
of the State Guaranteed Mortgage Institutions,
known as Fannie and Freddie. Apart from the fact
that these institutions accounted for the bulk of the
mortgage lending in the US, they were also attracting
investments in their debt securities from various
central banks of the world, especially because their
debt was implicitly guaranteed by US Government.
However, the collapse of Fannie & Freddie became
a national crisis.
In view of their importance both domestically and
globally, the US Treasury Secretary, Mr Hank
Paulson, and the US Administration decided to bail
them out, a bailout that was hailed by many observers
as a victory for the US financial managers’
pragmatism.
Heavy burden on US taxpayers
It must be granted that this saved various investments
by international investors in the Fannie & Freddie
debt securities, but the fact remains that the bailout
will leave a heavy burden on US taxpayers, especially
because the prices of houses, which form the basis
of securitisation, cannot be expected to be at a level
to sustain the value of the debt paper. The gap will
be a burden on US taxpayers.
While the US Treasury managers tried to stave off
a widespread effect of Fannie & Freddie crisis, they
did not do so when the latest victim of the crisis
came in the form of the century old investment bank,
Lehman Brothers. Lehman Brothers have links with
many other financial institutions in the US and
elsewhere.
The arguments in favour of the bailout of Fannie &
Freddie and Bear Stearns could apply equally to
Lehman Brothers. But Hank Paulson must have
10
News Bulletin October 2008
thought that enough is enough and the market should
learn to live with the consequences of its actions.
The result of this decision not to intervene in Lehman
Brothers’ case has been that the American financial
market has seized up. Liquidity has become very low
and the American stock markets have collapsed,
leading to further failures of some banks and financial
institutions.
The venerable insurer, AIG (American International
Group) has been bailed out with a $85-billion infusion.
The Federal Reserve has agreed to extend a two-
year loan to AIG in exchange for a 79.9 per cent
equity stake in the company and change in the top
management.
What was the proximate reason for this catastrophe?
Analysts have been quick to point out that the bursts
of irrational exuberance in the Greenspan years set
by low interest rates was partly responsible for
creating a complacent attitude amongst the markets
and the investment banks. It led to a built-in sentiment
that catastrophes would be averted and further the
Government would take care if any unforeseen events
happen.
Impact on rest of the world
Whatever the causes for its failures, the American
financial system, the main engine that drives the
world’s economy, is indeed in trouble. This has had
some disturbing consequences. America’s financial
investments are looking to Sovereign Wealth Funds,
their bete noire, to save them. They are also driven
to the ultimate irony of nationalisation of their private
sector.
This leads me to the question of the impact of these
collapses on India and the rest of the world. Despite
all the talk of India decoupling from the American
economy, the fact remains that India, like the rest of
Asia, is very much linked to the health of the American
financial system. For one thing, capital flows in the
Indian stock market under FII depend on the easy
liquidity in the American financial system. When the
recent catastrophic events blocked the liquidity, we
saw a corresponding fall in the stock markets of the
US, Asia and Europe. Further, the failure of the
American financial giants means that the growth
prospects of America will be affected. Many of our
industries, especially in the service sector, depend on
markets in the US and they will be adversely
affected.
Outsourcing industry vulnerable
This takes me to the unintended effects of
globalisation. The outsourcing industry of India
depends very much on the likes of AIG, Citibank and
Lehman Brothers. Our service industry will lose
business substantially when there are serious
problems in these institutions. The same is the case
with reference to our textile exports, which depend
on the health of demand in the US and Europe.
Perhaps, one offsetting fact is the decline in the price
of oil as a result of likely “de-growth” of the American
economy. Consequent on the financial sector collapse,
among other reasons, crude oil has been touching
sub-$100 prices. This is a bit of good news for the
Indian economy where inflation may abate.
But there is another down-side to it, namely, that
decline in capital flows into the stock market as a
result of fall of share prices has led to a change in
exchange rate and fall in the rupee vs dollar. While
this is cheering news for the exporting community, it
is not so good news for the fisc. The declining rupee
means that imports will cost more and the subsidy on
crude oil may not decrease in tandem with the decline
of oil prices.
In conclusion, it is difficult to insulate India or any
other country from the effects of the American
problems. While it is true that we can learn many
lessons from the crisis of the American imbroglio,
the answer is not quite simple.
Better regulation is not by itself an answer. The
problems arose because of the complexity of the
financial products and innovations introduced in the
American financial system. Innovation for the sake
of innovation can be disastrous.
The American experience should be a guide to us to
avoid such pitfalls. Governor Reddy took a tough line
in regard to encouraging innovations, but with
sufficient safeguards. May Dr Subbarao continue the
same tradition, learning from the US experience!
11
News Bulletin October 2008
The management of LIC has now pressed the alarm
bell, they seems to be hugely concerned with the
drastic fall in the market share, poor growth rate
and even negative growth rate. The rate of agency
recruitment looks even more dismal. They are now
sending signals to Dev. Officers, whom they were
neglecting till recently with haughty disdain, now
comes forward before each Dev Officer, with fervent
appeal, in order to tide over the precarious situation.
But Dev. officers are now a demoralized lot, caused
due to strings of event starting from GOIB in 2004
to recent desperately pushing of CLIA. Does
management of LIC has any answer to this present
specter of gloomy situation and more over the
question arises, who is responsible for all these? Why
such a situation arises when the protagonist of the
institution claimed, envisaged and envisioned huge
growth as well as market dominance with
overhauling of the entire incentive pattern and service
condition of Dev. Officer? These nagging question
would be reverberated all across for quite sometime
till a convincing answer is found as to who inflicted
injury to the robust and fast moving corporation.
When the field workers - the Dev. Officers had laid
a besiege before the LIC management praying for
their voice to be heard, expressing their concern
about the short sighted adventurism, the management
subverted the entire process of dialogue and thus
compelled Dev. Officer to divest itself of whatever
view point founded by them to SAVE LIC AND
PROTECT LIC. In fact the management of LIC
struck to their new independent mooring with the
strong belief that the ship will be most safe, but was
it?
A management which functions with unrestrained
and absolute executive power can not find virtue in
democratic processes and practices and it therefore
remains addicted to its thought process and thus falls
prey to historic blunders. The theory of GOIB as
emanated by LIC management is now proved beyond
doubt that it is nothing short of a Blunder. It is pity
that the management did not find any virtue to its
huge experience that it has gathered from its five
decades of existence, but has rather blindly and avidly
embraced itself to the present dictates of neo
liberalism, which prescribes to keep employees
Burning the chariot of ProgressCom. Gautam Sengupta
always under perpetual fear, holding them at ransom
and thus extracting maximum possible doling
pittance.
The pit falls of GOIB were not noticeable for the
first two years due to the huge buoyancy in the stock
market, which had its effect on the insurance market
as well, but with the great fall in the same market
the scheme of incentive has now turned topsy-turvy.
The ill and faulty designed scheme of incentive is
now proving counter productive and ultimately it is
the Corporation and the Dev. Officer who are
bearing the cross.
Now let us examine how the scheme of GOIB has
malfunctioned, what are its defect in its design and
structure. For this we will have to first understand
how incentive schemes are formulated and what its
fundamental are and its basics. The basic premise
underlying incentive wage scheme is that the money
can be used to induce effort on the part of the
employee. The objective of the incentive is generally
to improve the productivity and this is expected to
be achieved by relating increased wage payment
with increased productivity.
Broadly speaking incentive wage scheme can be
classified into individual and group or company wide
incentive schemes. These classifications with further
sub classification arise from the differences in work
situation, the difference in the assumed motivational
principles, and from different measures of
productivity used.
Individual incentive schemes has two distinct sub
classification and they are - Payment by Result
(PBR) system and 2) Measured Day Work (MDW)
system i.e. payment by time. Now what is PBR
system:-
Payment by Result System (PBR):-
The PBR system has a continuous relation between
money and result (output), therefore, different result
would fetch different wages, although, theoretically
the PBR scheme provides for payment only through
increase in output. It therefore suffers from various
limitation and thus the scheme are modified to
12
News Bulletin October 2008
accommodate the modern day requirement that
worker should be guaranteed minimum flat wage rate
and from this principle has raised the concept of
Accepted productivity Level. The APL is the level
of output above which the incentive wage payment
starts. This is the pace of work which is considered
as normal or fair and the level of productivity that
can be expected from unmotivated but otherwise
conscientious and fit workers. Since there are, so
many assumptions of normality and fairness the APL
are generally established jointly by management and
labor.
There is another level that is called Motivated
Productivity Level (MPL). The Management is more
interested for MPL which is the incentive pace which
can be maintained day after day without any harmful
effect on the worker. As with APL, the worker is a
normal worker but he is now financially motivated.
MPL is a function of human ability and of
management’s expectation - about average workers
productivity - derived there from. With an expenditure
of a certain amount of additional money, management
desires to raise the current productivity level to the
practicable motivated productivity level. Since the
human work ability has a limit and the extra wages
cost also have a limit, MPL is used for establishing
of APL with concurrence of the workers.
In order to formulate an incentive scheme we need
a ratio called Participation Ratio. Depending on the
MPL and APL, therefore, the Participation Ratio (i.e.
percentage increase in wages for one percent
increase in Productivity) can be established. In is to
be noted that MPL are physiological and psychological
norms and therefore, the employees can bargain with
management about these norms. The generally
presumed relationship is that MPL is one third or even
one fourth more than APL but management and labor
may arrive at different figures.
We shall not discuss Measured Day Work (MDW)
system or Company Wide Bonus Scheme (CWBS)
as Dev. Officers incentive is based on Payment by
Result System. Let us now discuss the probable flaws
or defects in the incentive scheme offered to Dev.
Officers which is known as GOIB, based on the
widely accepted principle and theory of incentive as
practiced by various industries. One of the major
problems of organization today is the same problem
that was faced by people for centuries i.e. to develop
technique that will give to people who do not have it,
a will or desire to achieve. It is therefore every
incentive scheme should include a fair amount of
factors that can motivate each worker; otherwise
the scheme proves to be futile and barren as it does
not yield. Let us now examine point by point how the
goose laying golden eggs was killed employing factors
in haste to seek and expedite huge growth with clear
disregard towards the theory and experience.
1) As discussed in the theory above, Acceptable
Productivity level and Motivated Productivity
Level are determined jointly by the labor and
management. LIC management failed to arrive
at any consensus with the representative of the
NFIFWI and had evolved a floor level and bench
mark with huge spurt in the level of productivity
to be achieved. The APL and MPL were
arbitrarily and whimsically set, not giving any
consideration to the real market condition. They
even simply skewed the scheme as per their
requirement and agenda, not giving a proper
disciplined judgment to work measurement,
resulting in demoralized field force, taking
recourse to dispute etc.
2) The GOIB brought huge instability in the earning
of the Dev Officers. The income of Dev.
Officers drastically fell despite clocking better
and improved production due to the inherent fault
in the scheme. It was a sordid tale of parental
authority where the management set a trap with
every step, the Dev Officers was required to
undertake thus virtually turning the scheme to a
trick of Heads I win tail you loose kind of a
situation. Today it is evident that even Dev.
Officers working in the range of 8 to 10 percent
of cost even do not receive any incentive.
3) The PBR system itself means a fluctuating
income for a worker since the work may not be
there all the time and the worker may himself
may not be able to work at the same high pace
on all occasion given the various condition (of
market for DO’s). In a competitive scenario, as
the present day, it is perceptible for an industry
like insurance whose demand are mostly inelastic
in nature, every scheme of incentive must take
into consideration the associated economic
factors or situation like slump, depressions etc.
Thus the scheme must be so designed that a
13
News Bulletin October 2008
stable higher wage is ensured, so that the senseof uncertainty can be minimized in order to keepthe productivity level augmented. Contrary tothe theory as propounded, the management ofLICI has envisaged a scheme where a hugedrop in wages with every reduction inproductivity through the proposed Special Ruleof 2007 (work norm) has been set. These mattersare disheartening the Dev. Officer.
4) Going by the theory again, it is evident thatincentives are paid whenever one crosses theacceptable productivity level and reaches themotivated productivity level. But in GOIB theparticipation ratio is not diligently set, anunnecessary large grey area is deliberatelycreated in order to keep a large number ofworkers out of the purview of incentive etc.
5) Incentive wage is paid when one attains theMotivated Productivity Level of performance,but when factors like growth etc are aligned withincentive scheme based on market conditionthen there should not be any disincentiveconnected with bench mark growth for not beingable to attain the same. As with everypercentage growth, profitability is achievedtherefore the worker should be compensated forit and no negative factors should be attached.
6) The GOIB is particularly a multi factoredscheme, it is a complex scheme and the averageDev. Officer is unable to comprehend it to itsentirety. It is because of these complicatedintricacies that Dev. Officer is unable tomaximize his income and therefore they areloosing heavily.
7) In a Payment by Result System (PBR) the onusis on the management to provide continuouslygood materials and well maintained machine ontime in order to ensure smooth production andthis involves tangible and intangible cost. It is adistinct case for Dev. Officer, who has to findand fend for him selves both the materials, toolsand infrastructure. Further the tools (agents inhis case) with whom he has to function havealso to be fabricated by him. For this purposeLICI had allocated expenses for Dev. Officerin the form of Additional Conveyance Allowance
and Reimbursement of Expenses. These are
also withdrawn and have thus caused huge wage
drift, i.e. while the expenses remain the samethe wages are reduced. The reduction in wageshas caused various activities of Dev. Officerinoperative leading to a cascading effect on hisperformance.
8) Every industry adopts various measures toovercome problem related to protection ofquality. LIC therefore has rightly removed thefirst year lapsed premium from the scheduledfirst year premium income earned by the Dev.Officers, while calculating incentive bonus. Butthe question here arise when the incentive bonusis calculated based on the first year premiumthen why second year’s lapsation has beenaligned with the scheme. Moreover theallocation cost of incentive of Dev. Officer areincluded in the first year premium then whypenalize severely the Dev. Officer for secondyear lapsation based on renewal premium onwhich he has no role to play. Even in general,lapses occur due to various influences and thereare many factors which are external in natureand these are all beyond the control of the Dev.Officer. Most of the lapses as studies undertakenby the regulator have revealed that they aremostly due to customer specific feature. Thusnetting of premium for quality maintenance, byadministering second year lapsation is nothingbut reducing the income of Dev. Officer indisguise.
9) The most dominating de motivating factor in theentire scheme of GOIB is the gradation aspect.In general, more incentive is offered for betterretention, low attrition rate and for creation ofprofessionals for a supervisory kind of job.Management of LIC has taken a contrary viewi.e., more the experienced and professionalscreated, lesser the incentive offered. It isparadoxical that a veteran Dev. Officer who hasreared a good professional agency organizationmay receive less incentive than a new entrant.A simplistic solution based arithmetically foraugmenting more recruitment of agents may notact as simple as being thought, the gradation actmore as a dissatisfier and it is due to this, thetrend of recruitment of agent has gone down.One must remember that every Dev. Officerhas a characteristic norm for pace of work andapplication which can be changed very little onthe whole by aligning several factors of
14
News Bulletin October 2008
disincentives. Moreover the matter of gradation
has conferred the entire scheme of incentive
incongruous to the accepted principles of
operation management. This has also been
illegally and illogically thrust; let us observe here
what the legal luminary Mr. Venkat Ramani,
Senior Advocate, Supreme Court of India, has to
say. While offering his legal opinion on the matter
of gradation as sought by NFIFWI, he said ‘‘it
appears that graded Credit System is more a
arithmetical formula without any nexus with
ground realities of task of functioning of Dev.
Officer. In a country like India, where a wide
range of economic and social groups are to be
targeted and where the task of assuring the
people is conditioned by these factors as well as
rural urban divide, any scheme of performance
appraisal must be flexible and informed by field
conditions. It also appears to me that the graded
system of credit disregards any other relevant
element of performance, which may have bearing
on the quantity of productivity. The Dev. Officer
can certainly complain about excessive emphasis
on the factors included in graded credit system.”
10) It has been experienced by various industries and
management expert that incentive wage
anomalies may arise due imperfect work
measurement or due to varying bargaining
capacities of individual. A Dev. Officer since long
has been consistently good worker but a bad
bargainer. This bad bargaining capacity has stem
from the fact that his entire bargaining power
has been nullified and eroded from the year 1981,
when an amendment was brought in the LIC Act
of 1956, which fully empowered LIC
management vide section 48 subsection (ii), to
bring change and modification in the service
condition of the employees at any point of time
as deemed fit by them. This legislation gave them
the absolute powers; yes it is of course true, they
do indulge in a process of consultation, which is
a kind of showcasing of a democratic process,
more of a facade but deep inside practicing
authoritarianism, whereby it conceals the fact that
it has already made a decision. During the
process of negotiation they adopt a bullying
tactics, involve in arm twisting and thus pressurize
the opposite party to obtain their consent to the
decision already taken by them, so that they claim
that the discussion is democratically evolved.
When their scheme of things fails, they
unilaterally impose it on the class of employees.This modus operandi is always adopted and it istherefore mostly the scheme framed do not
function upto the desired level
Finally the behavioral aspect of incentive, in everyincentive scheme whether PBR or Group Companywide schemes all rely on the presumption that every
man is capitalist as heart. Human behavior is,however much more complex in nature. Firstly it iswell known through the theories of the behaviorists
that money is most often a ‘hygiene’ factor or thatlack of it is a ‘dissatisfier’. Money could perhaps beused as motivator provided various other ‘dissatisfier’
are minimized, which means:
I) Managerial, Supervisory and other socialrelationship are good.
II) The worker feel secure physically and
emotionally; and
III) Working condition is adequately satisfactory.
Does such situation exist in the corporation? Recentlywhile introducing the GOIB and CLIA schemes
management has made a mess of the entire situation.They have denigrated the Dev. Officer’s image intoa veritable quagmire; they have even alienated Dev.
Officer from every process of Participation andthought. LIC since long has always employed liberallysmall reward and big punishment (small carrot and
long stick) for motivating Dev. Officer. The theory isnot presently working to its full potential. The modernpsychologist has long been interested in what happens
when people’s internal drives are replaced by externalmotivation. A host of experiments have shown thatwhen big threats and small rewards enter the picture,
they tend to destroy the inner drives. Pay, incentivecheque and pink slips (termination letter) might bepowerful reasons to get workers out of bed early but
they turn out to be surprisingly ineffective and evencounter productive - in getting people to perform attheir best.
If there is any lesson to be learnt from the present
situation, it is to win back the mind, body, heart andsoul of every Dev. officers as well as other workersand to create a situation whereby every workers
internal drive reigns supreme and through this the
corporation will soon regains its lost glory, otherwise
the hard facts will not obscure so easily.
15
News Bulletin October 2008
ICICI Bank: The fall and recovery
Source : CNBC-TV18
When the markets were in shambles on September
29 the ICICI Bank stock was down 11.97% on
rumours that the bank’s UK operations had
exposure to the bankrupt Lehman Brothers. The
bank’s UK subsidiary has an exposure of around
USD 80 million, against which there are provisions
of USD 12 million.
To stem the fall in the stock on September 30,
Chanda Kochhar, Joint MD and CFO, ICICI Bank,
said India’s largest private sector bank has a very
healthy capital position, “In the past few days, there
have been rumours being circulated about ICICI
Bank’s financial health in certain parts of the country.
These rumours are baseless. We wanted to clarify
that ICICI Bank has a very healthy capital position.
About 98% of the bank’s UK subsidiary investments
are in investment grade and above category. We
have also clarified that the capital adequacy not only
of ICICI Bank but also of the subsidiaries are very
comfortable.”
Earlier on the same day, the Reserve Bank clarified
that ICICI Bank and its subsidiaries abroad were
well and sufficiently capitalized. “The bank has
enough liquidity to meet the requirements of our
depositors.” Post-these two statements, the stock
rallied and ended the day up 8.56%.
Between October 1 and October 8, the stocks fell
15.89%. However, the Sensex fell just 13.23% in
the period under review.
But the pain was not over yet. On October 10, the
stock touched a 52-week low and ended around 20-
21% lower. At one point, it was trading 26% down.
The downfall was fuelled by alleged rumours that
the bank’s joint venture with Prudential was in
danger. There were also rumours of a stake sale by
promoters, and fall in deposits.
In its usual fire-fighting mode, Kochhar said the bank
had adequate rupee and global liquidity of Rs 12,000
crore. “We have no international investments, only
loans on our balance sheet. Our exposure to the
UK market is very small given our size and
profitability. NPAs stand at 0% in the UK subsidiary.
Over 90% investments in UK market are to
companies with at least ‘A’ rating.” She added that
the bank has not seen a scale-down in deposit growth.
On October 13, rating agencies like Standard &
Poor’s and Moody’s said the bank’s credit
fundamentals continued to remain strong. Both
agencies felt that the overseas exposure could be
easily absorbed by the bank.
To further reassure investors post the October 10
fall, KV Kamath, Managing Director and CEO,
ICICI Bank, said the bank is very well-capitalised
at 150% of the requirement. He added that the bank
is among the soundest financial institutions in the
world. “The anatomy of rumours suggests they are
intended to destabilize the bank. The bank will
continue to report malicious messages to the
regulators, and that rumours are being spread by a
market intermediary, and not by any bank. We can
see a clear patter of disinformation which is a cause
for worry. Rumours are playing negatively on the
sentiment of people.” He clarified that there has not
been any drastic decline in deposits in the last three
weeks.
Special team to inquire into ICICI Bank’s
complaint
MUMBAI: The city police will form a special team
to inquire into ICICI Bank’s complaint against a bear
cartel of brokers for allegedly hammering down its
share prices through rumours, a senior official said
on Monday.
Commenting on a 22-page complaint filed by ICICI
Bank, Joint Commissioner of Police (Crime) Rakesh
Maria said Economic Offences Wing (EOW), along
with Cyber Crime Investigation Cell, would
investigate the matter.
A bear cartel of certain high-profile brokers in
Bombay Stock Exchange, who have been selling the
shares of the bank for quite some time, might also
be behind the circulation of malicious rumours about
its financial status, the bank has alleged in its
complaint.
MEDIA WATCH
16
News Bulletin October 2008
“The bank has not named any specific individual or
organisation in the complaint,” Additional
Commissioner of Police (EOW) Sanjay Saxena said.
The police will be conducting investigations into the
allegations, along with the Securities and Exchange
Board of India (SEBI), he said.
ICICI had said it had conducted preliminary
investigation utilising its own machinery as regards
the source of such misleading statements, e-mails
and SMSs based on false, baseless information.
The complaint also said that malicious messages were
sent by a mass/group SMS sending website and
Maya news, having a strength of about 15,500
members.
Market turmoil rocks insurance industry
MUMBAI: The turmoil in the equity markets appears
to be taking a toll on the life insurance industry as
well. Growth rates for the industry have slowed
down and initial estimates from companies show that
companies are unlikely to fare better in the month of
September. Upto end August ’08 the life insurance
industry recorded a premium income of Rs 26,451
crore marginally lower than Rs 27,491 crore in the
corresponding period last year recording a growth
of 56%. The decline was largely on account of 29%
decline in business of Life Insurance Corporation of
India to Rs 14,360 crore compared to Rs 20,206 crore
last year.
The year-to-date figures show that the private life
insurance industry is growing at a healthy pace and
that it is the LIC which is dragging down growth.
However, an analysis of monthly figures shows that
there are signs of an incipient slowdown. Typically,
the life insurance industry witnesses seasonal growth.
The usual trend is for the industry to write 10%
business in the first quarter, 20% in the second, 30%
in the third and 40% in the fourth quarter. Also there
is a progressive increase in premium income as the
fiscal moves on. This year, however, some
companies have actually shown a decline in August.
Most industry officials feel that there is a slowdown
on account of the turmoil in the global markets.
Insurers feel that policyholders may delay their
decisions on channelling funds into the equity market
through unit-linked insurance schemes until the crisis
in the US market comes to an end. The flattening of
the growth is also a sign that companies are seeing
the law of diminishing returns come into play while
expanding their agency force.
According to Shikha Sharma, managing director,
ICICI Prudential Life Insurance: “The month on
month growth has come off a bit. People still want
to save money for retirement but they are waiting
for the volatility in the stock markets to come to an
end.” She added that the growth potential for the
industry continues to be there the industry may have
to wait for a couple of months of stability in the equity
markets. Vikram Mehmi, president and CEO of the
fastest growing life company says that there is
definitely a slowdown in overall industry growth. He
points out that there is a liquidity issue among big
buyers of insurance as well as they are now
postponing their decisions. However, retail sales
continue to remain powerful.
US Roy, managing director, SBI Life Insurance
which has moved to the number two slot feels that it
is not correct to term the lower growth rate as a
slowdown. He points out that despite the crash in
the stock market life companies has managed to post
a growth over last year where premiums were driven
by record growth in the stock markets.
According to Kamesh Goyal, CEO, Bajaj Allianz Life
Insurance, the life industry would need to change its
business model for the current environment. He points
out that Bajaj Allianz has managed to record good
month on month sequential growth in the last quarter.
However, the company has managed to record a
very small growth over the corresponding period last
year.
Insurers see big biz in political risk cover for
big cos
4 Sep, 2008
KOLKATA: Trust insurers to home in on
opportunities under the most testing circumstances.
With the Tatas on a pullout mode in Singur amid
mounting political heat, general insurers like ICICI
Lombard, United India Insurance and National
Insurance see a huge opportunity for customised
political risk covers for big business houses setting
up greenfield ventures in challenging locations.
Interestingly, such political risk covers would have
to be tailor-made for specific situations that may vary
17
News Bulletin October 2008
from one project to another. For other covers (read
non-political covers), insurers already have an off-
the-shelf project insurance that shields against
insurable perils like fires, riots, floods, damage to
equipment or project delays.
Political risk insurance can be opted by businesses
of any size against political risk, when the risk of
revolution or other political conditions results in a loss.
It is available for various shades of political risks,
including political violence, insurrection, civil unrest,
terrorism or war. As with any insurance, the precise
scope of coverage is governed by the terms of the
insurance policy. But one cannot get a venture
covered against government decisions that hurt
projects.
Simply put, a political risk cover will shield projects
scrapped due to political turmoil. A case in point, could
be the troubled Tata Nano venture in Singur. Such a
cover is not yet offered by all insurers in India but
could soon be a reality with demand from potential
investors. “We can always explore the option of
offering tailor-made political risk covers for specific
situations. But one needs to understand the risks and
offer proper protection that would be backed by
adequate reinsurance,” United India Insurance
chairman and managing director G Srinivasan told
ET.
ICICI Lombard reinsurance head Rajive
Kumaraswami said: “Shields from these kinds of risks
can be offered through tailor-made products with
heavy support from reinsurers after checking the
legality of offering such covers.”
ICICI Lombard, however, receives three to four
queries on an average per month for political risk
cover from companies setting up projects overseas
and has serviced five to six clients in the last two to
three years. “We have enough scope of offering
covers against these kind of risks with our reinsurance
partners. Although a risky cover, with high chances
of claims, we will start offering it if we find enough
demand,” added National Insurance Company
chairman and managing director V Ramasaamy.
Jai Balaji Industries MD Aditya Jajodia, on the need
for political risk cover for upcoming industrial projects,
said: “So far, no project in the country has been
covered against political risks. But perhaps, after
Singur, such a cover is something that will make
investors feel safer. More since land-related protests,
unreasonable or reasonable, are taking place in other
states too.” Interestingly, not all industry top notches
feel the need for such covers as yet.
When contacted by ET, Eveready Industries India
executive vice-chairman & managing director
Deepak Khaitan said: “I would rather not invest in a
state where we may need to go for a political risk
cover. Besides, the loss of time and effort that goes
with implementing a project, going through the political
unrest and subsequently, relocating it cannot get
repaid.” SREI Infrastructure chairman & managing
director Hemant Kanoria also tends to agree with
Mr Khaitan. “Because of one Singur, I don’t think all
industries coming to West Bengal will get affected
and one should start thinking in terms of taking a
political risk insurance cover.”
LIC may get to retain stake in blue chips over 10%
28 Aug, 2008
NEW DELHI: In a move that will enable Life
Insurance Corporation (LIC) to retain its stake in
blue chips like ITC, Ranbaxy, L&T, ACC, Reliance
In fra and Cipla, the insurance regulator may tweak
recently-announced investment norms for insurance
companies.
The Union finance ministry is examining the matter
in consultation with Insurance Regulatory and
Development Authority (IRDA). The ministry is
considering the possibility of revising the IRDA
(investment) regulations so that LIC does not need
to dilute its current stake in several blue chips.
However, the life insurance major will have to limit
future investments up to the prescribed limit of 10%.
“We are examining the matter and are likely to do
something soon to settle the issue,” said a finance
ministry official, adding it’s up to IRDA to take the
final call in this regard. IRDA may either revise the
norms or issue a clarification to let LIC maintain its
stake in these companies.
Last week, IRDA had issued the new investment
norms for insurance companies. Under these norms,
no insurance company can invest more than 10% of
its total fund size, or 10% of the outstanding shares
of the investee company - whichever is less - in any
company. However, LIC, the country’s largest
insurer, has invested more than the prescribed limit
18
News Bulletin October 2008
in many companies, including L&T, Reliance Infra,
MTNL and Ranbaxy.
Companies in which LIC has investments over 10%
include ITC, L&T, M&M, ACC, HPCL, Cipla and
Reliance Infrastructure. In some cases, it has
invested over 20% with special permission from
IRDA. For instance, LIC holds about 26.32% in
Corporation Bank.
Under the new investment norms, the regulator had
given more freedom to private insurers in terms of
investment, while aligning LIC’s privilege also with
the industry, allowing the public sector life insurer
to invest only 10% of its portfolio in a single company
against 30% earlier.
Liquidity main problem, will act swiftly: FM
As the stock market crashed under the pressure of
global meltdown and the RBI cut the CRR by one
per cent, Finance Minister P Chidambaram on Friday
promised to address liquidity and other concerns of
the economy.
He also announced the decision to constitute a group
consisting of top bankers headed by Finance
Secretary Arun Ramnathan, who is also Secretary
(Financial Services) to make a quick assessment
of the requirements of the liquidity and advise the
government accordingly.
“Credit is the lifeline of trade, commerce and
business and, hence, it is important that credit
continues to flow to all sectors of the economy. In
consultation with RBI and other regulatory
authorities, government will address the liquidity and
other concerns about the economy,” Chidambaram
said in a statement.
“It is also important to maintain our confidence in
the Indian economy. As the Cabinet noted on
Wednesday, the fundamentals of our economy are
strong and there are many indicators which affirm
the sound fundamentals,” he said in the statement,
released by the Finance Secretary.
Chidambaram, who is believed to have rescheduled
his trip to Washington for attending the meetings of
IMF-World Bank and G-20 leaders on the global
crisis, stepped in after the BSE Sensex crashed by
about 1100 points this morning.
Prompt action by RBI and Chidambarm’s statementhelped a substantial recovery but the selling
pressured emerged to leave the market volatile.
“I have requested the group to begin workimmediately, also visit Mumbai and submit an interim
report within a week,” the Minister said.
Reacting to the measures, bankers said that thoughliquidity would remain a problem, interest rate maycome down.
Depositors in “Banking Scare”
14-10-2008
Despite assurances, fear is mounting amongdepositors here of the safety of their deposits in
certain private banks. This has led to heavywithdrawals. The pressure was more on the ATMsas the banks had Dasara holidays followed by
Sunday.
The scare is more among the small depositors. Theywere withdrawing their money in a hurry, creating
cash shortages at some of the ATMs. However, theyneed to look for alternative investment sources asthey cannot keep the cash in their homes safely forlong.
Some depositors who were the early ones towithdraw their money have invested their moneyelsewhere, like in reputed mutual funds and other
investments they consider safe.
The assurance by Finance Minister Chidambaramand Reserve Bank of India Governor D Subbaraothat their money was safe in the banks is having
some soothing effect and is winning the confidenceof depositors in the nationalised banks. Somedepositors have moved their funds from the private
banks to the PSU banks.
Following the downturn of the economy in the USand the collapse of certain major operators in the
US financial market, depositors were scared thatthis could reflect on the Indian banks as well.
About a week ago rumours spread over the healthof the a large private sector bank and some other
private banks. E-mails went passing around askingfriends and relatives to withdraw their money keptin some of the private banks. The pressure thus
began to increase on the local branches of the private
banks.
19
News Bulletin October 2008
“Should I transfer all my money in my bank acco-
unt because of the fear here that all banks are losing
hea-vily due to the falling mar-kets,” such e-mails
are being sent by worried depositors of a few banks
in the private sector.
Messages also went round even among NRI friends
and relatives. They were suggested to ensure the
safety of their money, if any, in private banks in India.
This added further credence to the rumours that all
was not well in some of the private banks, resulting
in immediate withdrawals by their relatives in India.
Calls from worried NRIs to their parents or other
close relatives to know of the health of the banks
where they have kept money is continuing. The NRIs
are calling up their relatives to know if they have to
withdraw their deposits.
Meanwhile, a private sector bank has initiated
damage control by sending letters and SMS
messages to its depositors to ignore the rumours as
the bank was well capitalised. A somewhat relieved
depositor told Business Standard today he had
received a letter of assurance from a bank.
According to a depositor who had withdrawn his
money from the bank, they are allowed only one
withdrawal and they are being charged heavily for
the withdrawals.
Whether the efforts of a bank management to soothe
the nerves of its depositors over the safety of their
money would help retain their confidence is to be
seen only on Monday when the banks reopen after
the Dasara holidays.
ULIP LAUNCH, ADDITIONAL AGENTS
HELP LIC GAIN GROUND IN SEPT
MUMBAI: The launch of a new unit-linked
insurance plan (ULIP) - Market Plus - in late July is
said to have improved Life Insurance Corporation’s
(LIC ) growth in September. LIC had lost out on
market share and topline growth as it tried to move
away from ULIPs.
“We believe that we have neutralised some of the
decline recorded in earlier months in September as
we have managed to grow,” said LIC chairman TS
Vijayan. LIC’s September growth story is in contrast
to the feedback of the private sector where there
are indications that growth has taken a hit in
September. Official figures for new business growth
during September is expected to be released by the
insurance regulator later this month.
Another reason for the growth in business is the
number of new agents recruited by the corporation
under the chief life insurance advisor scheme — a
programme where senior agents recruit new agents.
The corporation is understood to have recruited over
30,000 agents during the current fiscal year. These
agents have brought in close to Rs 100 crore in less
than two months. LIC is planning to increase the
number of direct agents to one lakh by December
2008 and generate a premium of Rs 800 crore from
direct agents.
Officials say that LIC expects to eliminate the decline
by the end of December. However, this will be a
major challenge and will depend to a large extent on
the movement of the stock market. Bulk of the
premium continues to pour into ULIPs. Many
investors, who have put money in ULIPs in the
second half of 2007-08, have seen an erosion of their
capital due to a 35% crash since January 2008.
Although there are income schemes, these do not
generate as much interest as equity schemes because
of a number of competing fixed income options
available.
LIC’s new business premium for the first five months
of the current fiscal year has dipped 29% to Rs
14,360 crore from Rs 20,206 crore in the same period
of the previous year. However, the corporation’s
performance has improved recently with its
marketshare growing from 49% in April to around
54.28% in August 2008. Even in terms of number of
policies there is a decline from 1.4 crore policies
last year to one crore policies this year.
Insiders have attributed three reasons for the decline
- a long-standing dispute with development officers,
the stock market crash and the corporation’s decision
to move from ULIPs.
IRDA TO REVIEW INSURANCE COS’
FINANCIAL HEALTH
HYDERABAD/MUMBAI : The liquidity crunch
could force insurance regulator IRDA to review
domestic insurers’ business plans and assess whether
20
News Bulletin October 2008
companies can infuse extra funds during this financialyear. Money has become scarce due to the globalfinancial meltdown The ripples are being felt backhome, with banks reeling under a liquidity crunch.Insurers need capital to grow and promoters haveto bring in extra capital till the venture breaks even.Banks have been promoters behind some of theinsurance ventures in the country. The Indian banksare well-capitalised, according to the bankingregulator, but they have been indirectly impacted bythe global crisis.
Domestic insurers are relatively insulated from thecrisis, as they have no any overseas exposure. IRDAis still likely to review their ability to infuse extracapital to push growth. “The domestic insuranceindustry is well-capitalised. But we need to examinethe impact of recent developments in financialmarkets on the functioning of domestic insuranceventures. This would mean assessing their businessprojections and future capital requirements,” said RKannan, member, IRDA.
It is important to distinguish between solvencymargins and capital requirements, based on businessprojections. Solvency margins refer to the excessassets maintained by an insurer in the interest ofpolicyholders. The difference between actual capitaland solvency capital is the amount available forwriting the new business.
The solvency margins are comfortable for alldomestic insurers. Last month, IRDA clarified thatTata Life and Tata AIG General Insurance hadcomfortable solvency margins. This was to allay thefears of policyholders after the US insurer AIG raninto trouble.
“The solvency margins for all domestic insurers isaround 200% compared with the prescribed normof 150%. The extra 50% can be used to write newbusiness. If an insurer’s business projection crossesthis threshold, the company has to bring in extracapital to maintain the solvency,” said Mr Kannan.If an insurance company is unable to garner extracapital, it may have to go slow on writing newbusiness.When business growth takes a hit, thebreak-even point of a company will be pushed evenfurther.
A CEO of a life insurance company fears that abusiness slowdown could reduce the capitalrequirements of insurance companies. The slidingmarkets called for a change in product strategy.
However, companies that made huge investments inanticipation of new business, could face a problem,he said. The volatility in equity markets has impactedthe sale of unit-linked insurance products (Ulips).The risk, in this case, is entirely borne by the investor.There are 42 insurance ventures in the country,including 21 life, 20 non-life and one reinsurer. Totalassets under management (AUM) are said to exceedRs 8-lakh crore.
LIC, only institution strong in liquidity
The length of the queue for refinance from RBI willdetermine whether India’s liquidity crisis is comingto an end. Bankers say if the deMand for refinancecontinues to be in the range of Rs 40,000-50,000 croreduring the course of the week, the central bank mayhave to announce further easing.
The actual position in respect of liquidity in the marketwill be known only around Tuesday. This is becausethe outflow on account of RBI’s intervention in theforex market on Friday will not be known on Monday,which is a government holiday in the US, beingColumbus day.
RBI is reported to have sold intervened massivelyby selling dollars worth $2.5 billion, which draggedthe rupee back from a low of 49.30 to 48.6. Theintervention could result in outflows of over Rs 12,000crore, thus reducing the quantum of rupees availablefor lending.
Life Insurance Corporation is turning out to be theonly institution, with an adequate surplus in liquidity.The corporation has been making the best of thesituation by lending short-term funds to banks at highinterest rates. The corporation is also providingsupport to corporates by investing in corporate debt.
Although sale of new policies has slowed down forLIC, its monthly inflows are very high at over Rs10,000 crore. Besides LIC, a few large corporates,(Reliance Industries is frequently mentioned in thiscontext), are being approached by banks for short-term fixed deposits.
On Monday, money markets are expected to bebetter placed in terms of liquidity with Rs 60,000 crorecoming in on account of the lower cash reserve ratiorequirement. This is expected to soften the call rateto below Friday’s close of 16%. However, if the rupeecontinues to be under pressure on Monday, RBI may
be forced to intervene again.
21
News Bulletin October 2008
CIRCULAR FILE
Ref. CO/CRM/690/23 September 8, 2008
RE : Revival of policies / payment of unpaid premium under
ECS monthly mode at the cash counter.
It has been decided to allow payment of premium / or revival of such lapsed policies which are under ECS
Monthly mode by accepting the arrears of premium with interest at the cash counter, along with requirements
of continued good health, if required.
After such premium payment or revival of the policy, further premiums should be paid and continued thro’
ECS only.
Ref : CO/CRM/694/23 16th Sept. 2008
Re: Collection of premium through agents
It has now been decided to extend this facility of collection of renewal premium by the agents authorized by
competent authority under any inforce policy, irrespective or whether they pertain to the particular agent or
not. At present, this facility though extended for ULIP policies, the premium cannot be accepted online due
to technical reasons. Once the technical issues related to ULIP are resolved the said agents can accept the
premium for ULIP as well.
Secondly, the collection of renewal premium can now be done by cheque as well as by cash.
Ref.: CO / CRM / PS / 695 / 23 September 20, 2008
Re : Deduction of DAB premium from surrender value under Nav Prabhat Plan (T. 137)
It has been decided that there is no need to deduct. DAB premium at the time of settlement of Guaranteed
Surrender Value / Special Surrender Value under Nav Prabhat Plan (T.137). This provision shall be applicable
to all plans under which accident benefit premium is in-built. (e.g.T.No.91, 149, 111, 123 to 126, 150 &
182).
Ref : CO / CRM / 697 / 23 26/9/2008
Re : Role of Standing Committee for HI policies - Divisional Offices
It has been decided that the matter regarding admission and rejection / repudiation in the above referred
cases should be put through the regular process of the Standing Committee for claims as is being done for
all the conventional policies and Manager (HI) shall be an invitee member of the standing committee while
deciding those cases.
22
News Bulletin October 2008
Ref : CO / CRM / 698 / 23 3/10/2008
Re : SB Claim Settlement under SSS Policies
• Three or less premiums due immediately preceding months prior to the SB due date and not received
/ adjusted till the date of SB payment are not to be recovered from the SB claim amount.
• (ie. Booking liability and making payment with up to three terminal dues)
• Under all these SB payments FUP will be updated to the SB-due date and the arrears of premiums
will be shown as gaps in the gap-master, with a special flag to indicate SB.
Ref : CO / CRM / 700 / 23 October 3, 2008
RE : ASSIGNMENT UNDER LIC’S MARKET PLUS – 1 PLAN – 191
1. The assignment is allowed during the deferment period only.
2. The policy conditions No. 15 (suicide) and No. 17 (Assignment and nomination of the policy document
needs to be modified as under)
Ref : CO / CRM / 699 /23 October 3, 2008
RE : CHANGE IN MODE OF PAYMENT OF EXTENDED
PERMANENT DISABILITY BENEFIT (EPDB)
It has been decided to allow change in mode of EPDB payment from monthly to other mode of payments
in case of specific request received from the claimant. The factors to be used for conversion of monthly
payment of Rs. 1/- payable in arrears under EPDB will be as follows
Mode of payment Factor
Quarterly 3.0125
Half-yearly 6.0628
Yearly 12.2789
Ref : CO/CRM/PS/692/23 September 15, 2008
Re:Concessions and Relaxations to Policyholders affected by bomb blast in New Delhi on
13.09.2008
The serial bomb blasts in New Delhi on 13.09.2008 have caused considerable loss of lives. It is therefore
decided to provide concessions and relaxations in the area of Delhi Claim and Accident Claim Settlement
to mitigate the hardships faced by the claimants:
(For details, please refer original circular)