LIC demerger: Why it is not a good idea for India's insurance system

There is a recurring impulse in economic reform: when institutions grow large, layered and difficult to manage, the solution proposed is to split and unbundle them. Suggestions that LIC should be demerged to improve efficiency fit neatly into this pattern. Efficiency is, without question, a legitimate goal. The problem lies in assuming that fragmentation is an efficient means of achieving it — particularly in the case of LIC. 

Life insurance in India did not emerge as a conventional commercial activity. From its early beginnings in the 19th century to nationalisation in 1956, the industry was shaped by repeated private failures, weak household confidence and the absence of any meaningful social security architecture. LIC was created to fill that vacuum. Its mandate went far beyond selling insurance: LIC mobilised long-term household savings, extended protection across all income groups, anchored trust in contractual promises that span decades, and became a key institutional source of long-term capital and a credible sovereign-backed financial entity. The logo and the tagline yogakshemam vahamyaham became symbols of life insurance in India. These were not mere transitional functions. Many of the conditions that made them necessary remain firmly in place even today. 

 

It is therefore important to separate organisational size from institutional purpose. LIC’s constraints arise not because it is too large, but because it is required to serve multiple, and sometimes conflicting, objectives at once — commercial competition, social insurance, long-term investment and other socio-economic responsibilities. Perhaps these challenges need greater attention. 

When a prominent national bank merged all its associates and has started showing remarkable numbers; when the government is trying to consolidate medium-sized banks into four or five large banks; when discussions on consolidating public sector non-life insurance companies are gaining momentum; when the inorganic route has become the buzzword; and when the Reserve Bank of India, in a significant policy shift, has permitted banks to fund mergers and acquisitions, this suggestion to demerge one of the most resilient organisations like LIC looks retrograde and out of place. The trust and brand value it has built carefully over the years, its national stature, and its international rankings — the third-strongest global insurance brand, the fourth-largest insurer globally by reserves, and perhaps the life insurance company with the largest number of customers — would all be undermined. 

International experience, often cited in support of break-ups or demutualisation, offers useful lessons — but rarely the ones implied. Where reforms were poorly sequenced, the results were damaging. The United Kingdom’s experience with mutual life insurers in the 1990s is a case in point. Demutualisation unlocked capital and promised efficiency, but it also altered governance incentives in institutions carrying long-term guarantees. The collapse of Equitable Life, a UK-based life insurance company, at the turn of the century was not an isolated failure; it was a reminder that life insurance balance sheets cannot be treated like those of ordinary financial firms without carefully managing legacy promises and policyholder expectations. Trust, once lost, can be extraordinarily difficult to restore.

 

Japan offers another cautionary tale. Following deregulation in the 1990s, several life insurers failed when guaranteed returns faced a prolonged low interest rate environment.

 

By contrast, where structural reforms succeeded, the preconditions were very different. Canada’s demutualisation of large life insurers worked because it occurred in an environment with a mature public pension system, strong regulatory capital standards and a clear separation between retirement income security and commercial insurance. Australia’s experience is similar: mandatory superannuation ensured that old-age income did not depend primarily on life insurance products, allowing insurers to focus on protection and risk management rather than acting as de facto pension substitutes. In these cases, reform followed the establishment of social security buffers; it did not precede them.

 

That distinction matters greatly for India. Pension coverage remains limited, particularly outside the organised sector. Longevity risk is rising faster than formal retirement solutions. In this environment, LIC continues to function as a fallback institution for long-term security, especially through participating policies and annuities. Weakening that role before alternative systems are firmly in place would shift risk away from an institution designed to absorb it and onto households with little capacity to do so.

 

Concerns, if any, about LIC’s market dominance also need to be viewed in context. Liberalisation over the past two decades has fundamentally altered the landscape. Private insurers operate successfully in urban, higher-margin segments and have steadily scaled up. LIC’s continuing market share reflects its deeper reach into rural areas, its role in small-ticket policies as part of its social orientation DNA, and its execution of government-backed schemes. Market share, in isolation, is a poor yardstick for competitive distortion when obligations and risk pools differ so markedly.

 

Life insurance is long-duration, trust-based and behaviourally anchored. Size matters here. Reform tools suitable for one industry cannot be mechanically applied to another. Nor do regulatory and technological imperatives compel structural fragmentation. Risk-based capital, IFRS 17 and advanced analytics are necessary evolutions, but they are independent of organisational form and size. Indeed, scale and data depth are advantages in adopting such frameworks.

 

None of this suggests that LIC should remain unchanged. On the contrary, meaningful reform is overdue. But experience suggests that progress is more likely to come from functional clarity than from splitting the organisation: clearer separation of social and commercial objectives, explicit compensation for sovereign mandates, stronger governance, sales force discipline, better channel composition, enhanced use of analytics, customer aspiration alignment and sharper internal capital discipline.

 

From a macroeconomic perspective, LIC’s integrated balance sheet enables counter-cyclical investment, stabilisation of long-term bond markets and long-term infrastructure financing. Fragmentation would constrain this capacity when India’s development financing needs remain substantial and Viksit Bharat is actively pursued. There is also the vision of insurance for all by 2047 — an amrit kaal aspiration.

 

In life insurance, efficiency is not engineered by breaking institutions apart. It emerges when mandates are realistic, incentives aligned and trust preserved. India may well reach a point where deeper structural change becomes appropriate. We are yet to reach there.

 

(Suseel Kumar is former managing director of LIC and Sudhakar is former executive director of LIC. Views are personal.) 

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