Chronicler of India’s insurance history bids adieu

The chronicler of India’s insurance history from ancient to modern times, Mr Dharmendra Kumar, is no more amidst us. He bid adieu on 18 May.

Mr Dharmendra Kumar retired as executive director of Life Insurance Corporation of India. He also served stints as a faculty at the National Insurance Academy and as Dean at Birla Institute of Management and Technology.

He was interested in every aspect of insurance history, and his knowledge was breath-taking. He would pepper his conversations with references to anecdotes.

I learned from him that the Biblical story of Joseph or the Islamic history of Yusuf told in the Book of Genesis is one of the most intriguing financial history stories. It was the first insurance plan in recorded history. It captures the essence of how Joseph rises from a slave to a vizier in two words: risk management. Despite being exposed to cycles in nature since time immemorial, human behaviour is influenced mainly by recent experiences. A common tendency is to forget some of the more random and disruptive lessons of the distant past. Joseph devised a solution for dealing with Egypt’s perennial cycles of droughts and good rains. He also managed to discern a cyclical pattern around which he could build a lasting solution to the problem of hunger. One can trace Egypt’s role as the greatest civilisation of the ancient world to this single and far-reaching innovation of spreading the risk.

Mathematician Benoit Mandelbrot drew his theoretical construct from the Old Testament story of Joseph recounting the Pharaoh’s dream of seven fat cows being devoured by seven lean cows. The interpretation was that following seven good years of crop harvesting, seven bad years would follow. He postulated that movements over time tend to be a part of more significant trends and cycles more often than random ones. He coined the terms ‘Joseph Effect’ and the ‘Noah Effect’. They refer to the seven good years and seven bad years, respectively.

The Babylonian tablets and the codes of Hammurabi and Manu also refer to bottomry contracts and show the familiarity of merchants with insurance concepts in an era of caravan and sea trade. And the Sanskrit term “Yogakshema” in the Rigveda is about community insurance that Aryans practiced.

Kautilya understood the concept of risk and the relevance of the first two moments** of a probability distribution to decision-making when faced with risky situations. He incorporated inferential statistics into economic decision-making in antiquity much before the Western world embraced the idea. More specifically, he understood the concepts of risk-return trade-off, risk premium, loss-aversion, diversification and analysis of variance, and applied them appropriately.

According to Kautilya, the market for high-value products was very thin at the time, and their export was quite risky. He suggested financial protection measures to be provided to the traders and their merchandise. Also, he limited the proportion of high-value products in the total consignment to reduce the probability of getting robbed. He suggested diversification to reduce the risk.

Kautilya was farsighted as well as foresighted. He understood the role of capital formation in economic prosperity. He explained, “Wealth will slip away from that childish man who constantly consults the stars. The only guiding star of wealth is itself; what can the stars of the sky do? Man, without wealth, does not get it even after a hundred attempts.” He suggested measures to respond to an economic embargo, developed traffic codes to prevent accidents. He also harped on establishing industrial zones to prevent fires and highlighted the importance of adopting appropriate steps to prevent famines, floods, fire and epidemics.

In the Arthashastra, Kautilya describes that the state should use its expenses judiciously and take care of less fortunate ones. And they include children, the old, destitute, childless women and the children of destitute women, and those suffering from adversity.

The Directive Principles of the Constitution of India have taken a cue from this treatise. It calls on the state “to secure a social order to promote the welfare of the people”. Article 41 requires the state to provide public assistance to its citizens in case of unemployment, old age, sickness, disability, or “other cases of undeserved want”.

While Kautilya in the North gave pragmatic advice to manage the destructive economic instincts of humans, Thiruvalluvar in the South assumed the natural goodness of men and warned against institutional interference. In the timeless Tamil classic Thirukkural, he advocated limiting the state’s involvement to defence, social security and public works. He also stated that life-saving medicines and life-sustaining food and resources should be made available for all.

Mr Kumar often referred to the Charter of Freedom passed at the Karachi session of the Indian National Congress in 1931. Our freedom fighters included banking and insurance as strategic industries for mobilising public savings in the resolution. It also made references to concepts of social insurance and universal health insurance.

One can still read about India’s rich contribution to world insurance history in his magnum opus Thresholds in Indian Insurance published by Macmillan, which he shared with me and gave me the privilege to preview and comment.

His other popular books are Tryst with Trust, the LIC Story in two volumes updated and published during LIC’s Diamond Jubilee under the title LIC of India – A Saga of Trust: Story of six decades. These books capture many of the most dramatic events, including nationalisation and opening up the Indian insurance industry during an extraordinary life and career.

He kindled interest in me to learn about financial history. I have found the knowledge that I have gained over time extremely useful:

1. It prevents ad-hoc uses of history in decision-making, thus preventing the ultimate analytical error.
2. It forces us to think in the longue durée, which naturally fits in the context of insurance.
3. It fosters humility and enables us not to look at historians as less sophisticated because of their lack of access to better data, more developed analytic theory and better computational tools. It also helps us recognise the role of asymmetric information, negative externalities, and deficient regulatory apparatuses in a financial crisis.
4. It reminds us of the raw power of economic crisis to cause profound societal shifts. We should not risk ourselves getting condemned to a cycle of mistakes we can avoid.

I will always remember Mr Dharmendra Kumar as an intellectually generous and supportive well-wisher who devoted himself to furthering the understanding of the insurance sector’s tryst with trust by looking back to look ahead.

** Different ‘moments’ can describe the shape of any statistical distribution. The first four are:

1) The mean, which indicates the central tendency of a distribution.

2) The second moment is the variance, which indicates the width or deviation.

3) The third moment is the skewness, which indicates any asymmetric ‘leaning’ to either left or right.

4) The fourth moment is the Kurtosis, which indicates the degree of central ‘peakedness’ or, equivalently, the ‘fatness’ of the outer tails.

This piece has been republished with permission from the author. It was first published on LinkedIn and can be found here.