Working as an Assistant in LIC of India, Rockfort BO, Trichy, TN.
Having a strong belief that LIC's welfare is our welfare and always trying to work towards that. Also functioning as an office bearer of AIIEA Thanjavur Division.
"There are three units — one is investment operations
department, second is the monitoring department and third is the risk management and research department. There's
a big Chinese wall between these departments. There're checks and controls in the systems, and nothing can go
With an asset base of Rs 12 lakh crore, Life Insurance Corporation is, without any doubt, the largest financial institution in the country. in a conversation with GEORGE MATHEW, managing director of LIC THOMAS MATHEW says,
The Insurance Regulatory and Development Authority (Irda) has said private life insurers have failed to meet the breakeven targets indicated by them at the time of seeking a licence. However, companies have started taking corrective action and have reduced their operating expenses considerably.
In its annual report for 2009-10 released last week, the regulator said: “But for most of the companies, the expected break-even point has shifted forward as compared to what was envisaged at the time of their application for licence to underwrite insurance business in India.” According to Irda, the experience of the insurance markets globally indicates that companies in the life sector take 7-10 years to break even. In India, several insurance companies will complete 10 years of operations in the current fiscal.
The regulator has pointed out that the increase in expenses was largely because of the insurance companies’ inability to control procurement costs. “Although some increase in capital expenses was seen, increase in expenses of management , especially procurement costs of business , had increased significantly. Also, the companies exceeded their expected levels of management expenses per unit premium. Expense growth rate far outweighed the premium growth rate,” Irda said. What made things worse was that lapse rates affected profitability and rendered all pricings insufficient.
Even as insurance regulator IRDA insists that there should be guarantee on pension products sold by life insurers, Pension Fund Regulatory & Development Authority (PFRDA) chairman Yogesh Agarwal has said no such guarantee was desirable for products offered by fund managers under New Pension Scheme (NPS).
“We at PFRDA don’t favour any guarantee for our products. The pension fund managers regulated by PFRDA are not giving any minimum guarantee on returns in their products.
High-level committee set up to examine systems, procedures: MD.
LIC has a 73 per cent market share in the life insurance industry. We have nearly 27 crore policy holders. It is not a new company. We are confident that the trust of the public and the nation is with us
Mr Thomas Mathew, Managing Director, LIC of India
Officials of LIC and LIC Housing Finance were among the eight people accused by the CBI in the recent bribe-for loans case. The top management of LIC swung into action immediately, appointing a high-level committee to probe the matter.
The corporation has also launched a major campaign to reassure its employees, agents and policy holders, about the solidity of the corporation. In an interview to Business Line, Mr Thomas Mathew, Managing Director, LIC, said the systems and procedures in both the institutions are foolproof, and that all investments are made according to approved guidelines.
Profits are not the sole driving force for LIC. This objective was summarised by Pandit Jawaharlal Nehru on the eve of formation of LIC. “Life insurance becomes one of the major state undertakings of India. Its objectives will be to serve the individual as well as the State. The profit motive goes out of it and the service motive becomes much more dominant.”
The recent clarification by Insurance Regulatory and Development Authority Chairman that the Life Insurance Corporation of India did not break any rules and certainly it would not transfer money from one account to another in violation of the existing guidelines had brought cheers to millions, but it left them also wondering. “What is meant by transfer of money from one account to another? Why it is not permitted and does this restriction apply to LIC? To answer these questions, one has to understand the structural difference between LIC and private insurance companies.
The 109th Division of LIC---Thrissur--- was inaugurated by the Hon’ble Finance Minister, Govt of India, Shri Pranab Mukherjee on 27/11/2010. In his address, the Hon’ble Finance Minister said “LIC is very strong and stable organization……LIC is one of the success stories of the Country’s Public Sector. Encouraging performance of LIC has proved that a Public Sector Institution can perform well even under tight competition from national and international firms.” Referring to the recent media reports regarding LIC and LIC HFL, Shri Pranab Mukherjee said “There is no cause for any anxiety for the investors as not a single paisa would be lost by them.”
Time and again we have affirmed that trust is the most valuable asset of LIC- Trust of Policy holders’, Trust of employees and agents and Trust of the nation at large. But the recent media reports alleging lapses and referring to investigations by Govt agencies into our investments and into project loans of our housing finance company-LIC HFL-- have created confusion & concern among the public. Friends, the truth is as follows:
LIC HFL is a big sized housing finance company with total loan book size of `44,000/- crore- mainly in the retail segment. The Project loan is only 11.87%, comparatively quite low. The Gross NPA in Project loan is only 0.08%--among the best in the Industry. All the loans of the company are performing assets and backed by adequate security cover as per valuation. An internal enquiry by a committee has proved that---- all procedures for sanction of loan, consistent with Board approved guidelines, have been followed and that there are proper systems in place for sanction and disbursement. The investigation is about 8 companies and Outstanding balance is only `388 crore, a very small amount compared to overall book size and all these are performing assets. There is no systemic failure; nor have any rules or procedures been Media reported also about investigation into LIC’s investments in some real estate companies. The facts…. The total assets of LIC as on 30/09/2010 are `12 lac crore. LIC’s exposure to real estate is hardly 0.68% of our total assets. LIC’s equity exposure to realty companies is only 0.66% of our total equity and in loan only 2.38% of our total corporate loans. All these are performing assets in our books backed by proper security cover.
In corporate loan segment, Gross NPA is only 0.90% showing Standard Assets of 99.10% as per regulatory norms. Our Net NPA is only 0.19%-- perhaps the best among financial institutions. LIC has proper systems and procedures for investment of funds. All our investments are decided by/reported to the Investment Committee and no single individual alone can take investment decisions. All investment decisions are on the basis of Insurance Act, IRDA Investment Regulations, Investment Policy duly approved by the Board, Investment Committee guidelines and Standard Operating Procedures. All investment proposals are backed by research reports from Risk Management & Research Dept. All these show how foolproof and time-tested our investment practices are.
The media earlier reported also some valuation deficit of `14,000 crore under three of our pension schemes. But the fact is that this deficit is only notional, actuarially estimated present value of future liabilities till the last annuitant is paid. It is a deficit which may arise over future years. This estimated valuation deficit is provided for at the time of actuarial valuation on an year on year basis. The notional deficit as reported by the media is only a small fraction of the total fund size. Chairman, IRDA also has given a ‘clean chit’ to LIC and stated that “there is no violation committed by LIC and it is just an actuarial shortage to current estimates, which is not a real cash shortage.”
Total Assets of LIC are far more than LIC’s Total Liabilities and we have provided for a Solvency margin of 154%, which is `46,718 crore as at 31/03/2010. The total valuation surplus of LIC increased from `10,949 crore in 2002-03 to `23,478 crore in 2009-10 after providing for deficit in Pension business during these years. Our Balance Sheet is inherently very strong. With our prudent practices, we have built in mechanisms to manage all kinds of risks on behalf of our Policy Holders’
Shri R Ramakrishnan, eminent actuary in his article in the “Hindu” dated 21/11/2010 titled “LIC Pension Fund, The Real Facts” has well clarified the confusion created by some newspapers and stated that “the perceived loss into Pension fund is only due to lack of understanding of the guiding principle of insurance.”
Friends, let me assure you that we are fundamentally, structurally and financially a very strong organization. The nation trusts LIC. All attention and expectation of the nation is on us.
Yes, these are trying times….
but we shall not fall prey to malicious rumours…….
we shall stand united to defend the honour of our dear organization…….
we shall reiterate our commitment to the nation with higher business
performance and better customer service.
In a season of scams, LIC has come under harsh media glare. The CEO of LICHF has been arrested on bribery charges, and whispers of operators palming off securities to LIC and its AMC continue to float. In an exclusive interview with ET, chairman TS Vijayan explains what it means for him and the country’s largest investor. Excerpts:
There’s a spate of bad news pertaining to LIC. Losses in the mutual fund, the arrests of LIC secretary (investment) and LIC Housing CEO, and shortfall in guaranteed return products. Are these connected in any way?
No, they are not related in any way. They are isolated incidents. Whereas in the case of mutual fund, changes in regulatory practices have resulted into some losses , the other two incidents mentioned are matters related to individuals. As far as the shortfall in old guaranteed return policies is concerned, it is also not unusual for some plans to be in a deficit. Even in banks, there will be some loans that are below the cost of deposits, but that does not hurt institutions as long as they have an overall margin. A corporation that sees inflows of hundreds of crore every working day does not have any scope of timing the market.
The news reports stating that the finance ministry was looking into LIC’s investments and the fact that there was a reshuffle in the investment department some time ago seem to suggest that LIC knew something was amiss. This is really not the case. There is nothing amiss with the working of the investment department of LIC. The reshuffling in the investment department some time ago was done as a part of our ongoing restructuring process to cope up with the increasing volume of activities and prudent risk management strategy. The Insurance Regulatory and Development Authority (Irda) was kept informed about this.
Going forward, will there be further changes in portfolio of officials?
Restructuring and changes in the portfolio of officials working in the investment department are an ongoing process. Such a reshuffling becomes necessary as a risk management strategy, and sometimes also to give better exposure to officials working with various sections of the investment department.
To what extent are policyholder funds in LIC or investor funds in LICHFL impacted?
The policyholder funds in LIC will not be impacted due to the recent happenings. Our exposure in LICHFL comprises 36.54% equity, Rs 5,753 crore of NCDs and Rs 1,247 crore of NCBs. The servicing of portfolios has been regular and there is no default. There might have been a marginal impact in the market value of equity shares, but this is purely due to fluctuations in the market price of the company; fluctuations and corrections in the price of scrips traded are regular happenings in the stock market.
In no way the quality of our investments was compromised. Moreover , the market price of LICHFL share had gone up from Rs 707 on January 29, 2010, to Rs 1,496 on September 29, 2010, and the present correction in the market price does not impact LIC policyholders in any significant way. There has also not been any impairment in the equity of our investments with LICHFL. Our average book value per share is Rs 50.43. Are the investment department’s risk management strategies adequate? Will you be revisiting them?
LIC has appropriate risk management strategies and practices in place. The risk management policy of the corporation is continuously being reviewed. The corporation has also constituted two separate board level committees—risk management committee and asset liability management committee.
These committees meet at regular intervals and review the risk management practices of the corporation. We have been regularly reviewing and mitigating risks, which is a continuous process. The investment policy of the corporation is also being reviewed at half-yearly intervals as a prudent risk management practice.
Foryears,LICandIrdahavefailedtoarriveatanagreementon the manner in which investment limits apply to the corporation . Going forward, how do you plan to deal with this so that you do not come out as being on the wrong side of regulation?
There has been no contradiction or conflict with the regulator except that there are a few issues where our views in the matter of interpretation of insurance laws and regulations were different . As an insurance company belonging to the public sector, we have been strictly complying with all regulations, statutory norms and satisfying the regulator by complying with all their requirements .
Is there a need to review the manner in which the investment department deals with intermediaries?
This is an ongoing process. We have adequate systems and controls in dealing with intermediaries. Apart from internal systems and controls, our investment department is subject to concurrent audit of 100% of the transactions of corporations. The systems and controls are also subject to system audit once in every three years. Irda has also been conducting periodical inspection to review our systems and procedures. Our systems are effective. Nevertheless, we have been reviewing the systems and procedures regularly to cope up with the volume of activities, market demand and regulatory requirements. LIC Housing Finance had shown rapid growth in recent times and had increased its share of business. Do you see business slowing down as a result of the recent incidents?
The growth of business in LICHFL is related to the development of the realty sector and is also related to the demand and supply in the housing loan market. Till date, we have not come across any situation where we have found a compromise on the quality of the underlying and asset cover. As such we do not visualise any slowdown in the business of the company.
There has been a slowdown in renewal premium under unitlinkedinsuranceplans (Ulips). Also,the new regulations have been a dampener for the life industry. How do you see business growth in the coming months of the fiscal?
The recent changes in Irda regulations with regard to Ulip plans will take some time to be absorbed by both the customers and the agency force that sells the policies. We have, therefore, seen more sales of single premium policies in comparison with non-single premium policies that may in turn affect renewal growth. Another issue that has affected renewal growth is the rise in Sensex that has motivated some Ulip customers to go for profit booking.
To what extent has LIC succeeded in islanding its liabilities under its guaranteed return policies. When will these liabilities where there is a gap between the promised return and market rates be extinguished and what will be its impact on the balance sheet?
The annuity policies are repriced periodically. We have been islanding and valuing the liabilities under guaranteed annuity plans, and liabilities in such plans are detailed in the actuarial report and abstract submitted to Irda. As most of these polices are life annuities, with return of corpus, the liabilities shall remain till the survival of the last annuitant.
It may be mentioned that if the gap between the promised return and market rates is closed, then any such guarantee may become irrelevant. Section 24 of the LIC Act states that the corporation shall have its own funds and all receipts of the corporation shall be credited to there to and all payments of the corporation there from.
The “valuation surplus” at the end of each year is determined as a difference between the value of assets representing the policyholders fund and the total liability under all the policies with guarantee or without guarantee, participating or non-participating , linked or non-linked as determined by the actuary and is distributed as per Section 28 of the LIC Act. The balance sheet will, therefore, not be impacted with the movement of liability over time.
In his 33-year-long career, Thomas Mathew has never seen Life Insurance Corporation of India (LIC) attract so much media attention. In an interview with Sumit Sharma and Joydeep Ghosh, the LIC managing director says while the risk-management procedures are time-tested, the insurer has set up a high-powered committee to re-assess its systems. Edited excerpts:
In the last few weeks, the entire LIC group has been under intense scrutiny. What went wrong? Nothing went wrong. The Insurance Regulatory and Development Authority (Irda) has already clarified that our insurance business has an actuarial deficit of Rs 14,000 crore and it’s only a notional loss. As for LIC Housing Finance (LICHF), it has a loan book size of Rs 44,000 crore. Of this, a major portion is allocated to the retail segment. Corporate or project loans account for just 11.87 per cent. Non-performing assets are only 0.08 per cent – the best in the industry.
When these reports surfaced, we constituted an internal committee, which reported that the procedures followed for sanctioning loans were in accordance with the board-approved guidelines. No rules were violated. All of them are standard assets. Crisil has reconfirmed the company’s AAA rating. But if any correction or change in procedures has to be made in LICHF, we will do it.
What about LIC Mutual Fund (LIC MF)?
In terms of assets, the market share of LIC MF was 12-14 per cent two years back. Unlike others, we are more into liquid funds. This is an inherent weakness we are trying to correct. Meanwhile, there were regulatory changes in the liquid fund category that led to losses.
The losses were reported to the AMC (asset management company) and it was decided that we should absorb these rather than passing them to investors.
You have not been able to attract fresh money either.
We are making our marketing more vibrant by contacting more clients and customers. We are entering into a joint venture (JV) with Nomura and revamping our IT (information technology) set-up, procedures and fund management capabilities. We hope to get global expertise from this joint venture.
Is Nomura having second thoughts on the JV?
There are absolutely no issues or apprehensions. There are some delays, but it should happen at the earliest.
Do you feel LIC needs to be a lot more transparent?
There is no opaqueness. LIC is a government-owned company. Investments and functions are governed by the Insurance Act, 1936, the investment regulations of Irda and other rules.
We have an investment committee, a sub-committee of the board, to check investments. This committee meets every month and goes into the details of all investments. The investment committee comprises not only LIC officials but also finance ministry officials, besides heads of banks and financial institutions. Every operation and investment has to be reported to the board, the committees and a policyholders’ protection committee. It is a board-run company.
Are there any internal controls or systems that need to be reviewed?
We have set up a three-member committee, which includes two executive directors, to look into the systems. It will submit a detailed report within a fortnight.
The annual accounts for the year ended March are still to be tabled in Parliament. Don’t you think such delays make the numbers less meaningful?
Our accounts are with Parliament for approval. You are right; there is a time gap. But we handle large volumes locally and globally, so it takes time. We are taking IT initiatives to correct this. Hopefully, we will be able to present it to an earlier session (than the winter session) of Parliament next year.
Won’t returns to other policyholders get affected because of ‘notional actuarial loss’ in three schemes, as the gap has to be bridged from the profits of other schemes? We are providing for it every year in our balance sheet. The valuation surplus of LIC is increasing every year. Last year, it was Rs 21,000 crore, up from Rs 10,000 crore a few years back. Ninety-five per cent of this goes back to policyholders. Also, while Irda mandates a 150 per cent solvency margin, we have provided 154 per cent at Rs 46,000 crore.
What are you doing to restore LIC’s image? LIC is a strong brand. Some things happened, which were unfortunate. But media reports also lacked objectivity. We are informing our policyholders. The finance ministry and the regulator have already said that LIC is a strong and stable institution.
Private Life Insurance Cos. hiked Mortality charge in new ULIPs
despite increase in life expectancy
Longevity should reduce mortality charges. Instead, many insurance companies have resorted to increasing it. It could be just another way to deceive customers and fill their coffers through the additional charges.
The average life expectancy in India for males has increased from less than 60 years in the 1990s to over 67 years today, mainly due to medical advance. One would have expected that this would result in lower mortality charges in life insurance calculations. However, the reverse seems to be the reality.
Mortality charges of new ULIPs have gone up. Indian insurance companies use LIC's mortality table (which was prepared 15 years ago) as a base and combine that with their own claims experience and expenses to price products. This is a subjective matter and hence the mortality charges of insurers vary, but there is no downward trend.
The cover story in a recent edition of Moneylife magazine exposed how insurance companies have not really reduced premium allocation and the policy administration charge. The new ULIPs carry more charges than old ULIPs over a period of five years or more.
Interestingly, many insurers have also increased the mortality charges, probably because it is outside the cost cap of the Insurance Regulatory and Development Authority (IRDA). Insurers are becoming creative in finding ways to levy charges on customers. In some cases, the payment for accidental death benefit is more in new ULIPs and hence the mortality charge has been increased substantially.
The Bajaj AllianzMax Advantage brochure specifies that in case of death the company will pay the sum assured and the fund value to the nominee. Apart from this, an additional sum assured shall be payable if the cause of death is an accident, subject to the policy being in force. These additional benefits that were not provided by Bajaj Allianz iGain II (Old) has jacked up the mortality charge substantially. (The tables indicate the mortality charge per Rs1,000 sum assured for a male life in the old and new ULIPs.)
The Reliance Classic plan brochure specifies that an additional amount equivalent to the base sum assured is payable in the case of accidental deaths. The additional benefit has jacked up the mortality charge substantially.
Birla Sun Life Dream Endowment plan (new) does not give an additional benefit, but it has increased the mortality charge for the younger age groups and reduced it for older age groups following on a study of mortality experience.
Moneylife tried to contact Bajaj Allianz, Birla Sun Life and Reliance Life on the justification for the increased charges, but did not get any response from these companies.
Aviva and Metlife have also hiked mortality charges by about 10% and 20% respectively.
The new premiums of country's largest insurer Life Insurance Corporation (LIC) has breached the Rs 50,000-crore mark during April-October period this year, an increase of 66 per cent from the corresponding period last fiscal.
In the first seven months of the current fiscal, LIC's new premium stood at Rs 50,605 crore compared to Rs 30,469 crore during the same period last year, Insurance Regulatory and Development Authority (IRDA) said in its monthly data.
Overall, the life insurance industry mopped up new premium of Rs 69,706 crore during April-October this year, up from Rs 46,689 crore in the corresponding period last fiscal. (49.29%)
The 22 private life insurers have collected Rs 19,099 crore in the first seven months of 2010-11, up from Rs 16,217 crore in the same period last fiscal. (17.77%)
Among private insurers, ICICI Prudential has collected the maximum Rs 3,639 crore new premium during April-October period this year, an increase of 40 per cent from the first seven months of 2009-10.
During April-October last year, ICICI Prudential mopped up Rs 2,586 crore new premium.
SBI Life has collected Rs 3,538 crore in the first seven months of the current fiscal, up from Rs 3,073 crore during the corresponding period last year.
Similarly, new premium of Reliance Life grew to Rs 1,617 crore during April-October this year from Rs 1,498 crore during the same period in 2009-10.
On the other hand, the premium of non-life or general insurance industry grew over 22 per cent during April-October period this year.
The 18 insurers mopped up Rs 24,161 crore premium in the first seven months of the current fiscal from Rs 19,680 crore in the corresponding period last year.
Out of Rs 24,161 crore, the four public insurers -- New India, National, United India and Oriental -- collected Rs 14,089 crore in the first seven months of the current fiscal.
During the corresponding period last year, these state-run insurers mopped up Rs 11,635 crore premium.
Media is pointing entirely towards LIC for the downfall of Stock Markets during the past few days. Campaign is going on as if the safety of policyholders' money with LIC is under threat and LIC is amidst a mega scam. What is really happening?
There were some wrongdoings happened at LIC HFL. LIC didn't refuse it and took firm actions immediately. New Chief Executive (Mr.V.K.Sharma) has been appointed and the necessary actions on the culprits were assured according to the staff regulations apart from the actions from the side of CBI and other agencies. What is worth to highlight here is the swift of action of the LIC Management. All actions have been taken on the very next day and the Chairman of LIC visited and explained the safe position of LIC to the Finance Ministry. Is any other Public Sector or Government organisation having the guts to call for a Board Meeting in less than a day's time and take this much firm actions? That shows the strength of the LIC!And that strength itself made the supporters of private sector afraid of LIC and to cry as if there is a mega scam!
LIC HFL is one of the very large number of Companies in which LIC has invested. The difference here is that LIC is the promoter. That's all! So the argument that any wrong doing at LIC HFL is at LIC itself is baseless and purposeful.
The money at LIC HFL is still safe even though there were some wrongdoings! Yes, the percentage of NPA (Non-Performing Assets or for easy understanding those loans could not be recovered) is at 0.84% in the case of retail sector, that is loans given to individuals! Actually it is accused as some fraud has taken place under Corporate Segment.But the NPA under corporate portfolio is at 0.08% much lower than that of the individual portfolio of LIC HFL itself and very much lower than the industry average!! (Source: Businessline)
Secretary Investments of LIC was also arrested, so what happened on the part of LIC?
Go through the lines from DNA:
The Economic Offences Wing (EOW) of the Central Bureau of Investigation (CBI) suspect that price sensitive information was leaked about block deals entered into by the Life Insurance Corporation (LIC) involving at least eight of the beneficiary companies named in the FIR of the multi-crore housing loan scam.
Block deal is defined as a single transaction of a share lot of five lakh shares or of Rs5 crore, said an expert.
Explaining the modus operandi employed by the suspects, CBI sources revealed that the planning about block investment made by LIC in the particular stock would be leaked by Naresh Chopra, secretary (Investment), LIC, to Rajesh Sharma of Money Matters (India) Pvt Ltd.
“The investment plans of the companies are meant to be kept secret as it involves the company’s strategic investment of the shareholder’s money,” a source said.
Sharma, who was in close contact with Chopra, would then selectively pass on this price sensitive information to other market participants.
As the news of LIC, the single-largest insurance company, investing in these firms reaches the market, the value of their shares would increase and that would lead to huge profits in the stock market. “We have enough proof to back our claims,” said a senior CBI officer. (Source: DNA)
That's why the Chairman of LIC told that the housing finance racket involved only individual officers who will be taken care of by the CBI and LIC is VERY STRONG! "Scam means somebody is misusing money... somebody is losing money... these are false schemes. It is proven that they (arrested by the CBI) are individuals who are charged by CBI. That (legal procedure) will take its own course", he added! (Source : ET)
Nothing more than that and all the others are rumors!
TATA AIG Life's Expenses of Management for the years
2008-09 is 114.90%
2009-10 is 117.28%
i.e. the Co. is spending more money than it's premium collection, it seems.
Can a company, which spends more than it collects, repay the money to policyholders?
Explain to your clients and friends!
The Insurance Regulatory and Development Authority (Irda) has slapped a fine of Rs 5 lakh on Tata AIG Life Insurance for alleged violation of regulatory guidelines.
In an order, Irda said Tata AIG Life's expenses of management crossed the prescribed limit in 2008-09, following which the regulator had asked the insurance firm to ensure convergence with regulatory norms.
But the EoM statement submitted by Tata AIG Life for 2009-10 indicated that the company did not follow the regulator's directive.
"This is a violation of Irda’s direction...,” the order said. Accordingly, the company has been directed to pay a penalty of Rs 5 lakh within 10 days.
The Irda order pointed out that Tata AIG Life went on an expansion spree by opening branches in 2009-10, even though it had assured Irda that it would restrict its expenses.
“Contrary to the directions of the authority and assurances provided by the company to the authority while requesting for approval to open new branches offices in 2009-10, Tata AIG has not complied with the limits on EoM,” it said.
The Insurance Regulatory and Development Authority's (IRDA) probe into the alleged violation of rules by the Life Insurance Corporation of India (LIC), pertaining to transfer of profits among its schemes, has revealed that no violation was committed, IRDA chairman J Harinarayan said here on Friday.
"There are no violations by LIC. There is an actuarial shortage as to the current actuarial estimates, which is not a real cash shortage," the IRDA chief said.
"They (LIC) project the gap between the assets and liabilities assuming a certain pattern of liability and a certain generation of income from investments made. And on that basis, they count it backwards, discount it appropriately and so there seems to be this much (Rs 14,000 crore)," he explained.
According to the IRDA chief, the actual cash disparity could be much less than the initially estimated Rs 14,000 crore. "The actual cash disparity could be of the order of Rs 300-400 crore per year. It is entirely possible that in years to come this imbalance is rectified so at the moment there is no cause for concern," he said, explaining that LIC generates a lot of surplus, which technically belongs to shareholders, and could be used by LIC to meet the shortfall in cash flow.
Allaying fears about the safety of public money, Harinarayan said: "These figures are disclosed in their annual accounts and are part of their non-performing assets (NPA), which are less than 1% of the asset base at about 0.75%. So there is no need for any anxiety on this front."
The report appeared recently in the media that the Life Insurance Corporation (LIC) suffered a notional loss of Rs.14,000 crore in three of its schemes has been cited as one of the reasons for the stock market fall on November 16. What are the real facts?
Till March 1987, the pension portfolio was just a spec in the corporation's total portfolio. In the context of rising yields on bank deposits and corporate bonds, the pension rates were unattractive. Realising the need for developing the pension business, so essential for ensuring social stability, the government requested LIC to introduce a pension plan with attractive returns. Permission was given to the corporation to invest the pension fund equally in government securities and corporate bonds.
LIC introduced two plans ? Jeevan Akshay (immediate pension) and Jeevan Dhara (deferred pension). Under Jeevan Akshay, for a single premium of, say, Rs.1 lakh, a life pension Rs.1,000 a month was guaranteed, with provision for return of the single premium on death of the policyholder. Equally attractive returns were provided under Jeevan Dhara. In 1997, LIC was directed to introduce a more comprehensive pension plan, Jeevan Suraksha.
The two plans
In the late 1980s and in the good part of 1990s, it was possible to obtain an yield of 16.5 per cent under the investment pattern permitted by the government ? much more than the minimum yield of 13.5 per cent required to meet the obligations and expenses under these plans. When the yield on investments began falling, LIC was not able to revise immediately the premium rates under these plans. However, once the Centre opened up the insurance sector, the premium and pension structures under these plans were revised and aligned with the then market conditions.
In 1987, compared to the total life fund of Rs.12,000 crore, the Pension and Annuity Fund of LIC was just Rs.350 crore. While the total Life Fund is about 100 times its value in 1987, the Pension and Annuity Fund (under linked and non-linked business) has now grown by about 300 times. It will continue to grow rapidly in the coming years and, within a decade, the fund will match the Assurance Fund in terms of size and profitability and emerge as the second arm of the corporation.
Where did the capital come from for financing the development of pension fund? The with-profit (participating) policyholder contributes some additional amount, known as bonus loading, with every instalment of premium. This bonus loading is actually a contribution towards capital. This invisible capital of a life insurance company goes on increasing with continuous flow of new business. This is how LIC has been functioning with virtually no visible capital, but generating huge profits. The profits generated from deployment of capital are given back in the form of bonus along with capital at the time of exit of a policy. The assistance being extended at present from assurance business to pension business is not a subsidy. Subsidy means a non-repayable loan. On the contrary, what has been done is similar to creating a venture fund out of the capital contributed by the policyholders and using the same to finance the emerging pension business. This has not in any way harmed the interests of the past or present policyholders, but will only give high return to them in the coming years.
The pension business will start yielding rich dividends in the near future. Not only the present and future policyholders, but the entire nation will benefit from this pension fund launched two decades ago.
The profits generated, when the yield on pension funds was more than the minimum required, were not kept in a separate reserve, but merged with the total profits, a part of which was utilised to finance the rapid growth of the assurance business. Now the flow is in the opposite direction.
In life insurance, while determining the premium rates, long-term assumptions have to be made regarding various parameters. The Actuary has to ensure that the premiums charged under each plan/scheme are fair and equitable. Over the years, there will always be variations, favourable and unfavourable, between these assumptions and actual experience. While the experience under one group of policies is favourable, that under another group may be unfavourable and vice-versa. The profit or loss emerging due to such variations has to be shared by all policyholders.
Insurance companies had been functioning on this principle for more than a century. The perceived loss in the pension fund of LIC is only due to lack of understanding of this guiding principle and artificial segmentation of policies into multiple water tight compartments.
One has to understand and stick to the basic principles of insurance and desist from blindly copying whatever is happening in other countries.
Life Insurance Corporation of India (LIC) saved government's divestment programme from disaster by investing up to 11,000 crore in public sector companies last year. According to the finance ministry statistics, LIC accounts about 43 percent of the Rs 25,000 crore raised by the government from four share issues.
To save the follow-on offers of NMDC and NTPC, LIC did major investments subscribing up to 63.72 percent and 49.48 percent, respectively. But both the companies did not perform very well . Although their retail participation did not double or triple the government still earned a profit of Rs 8,000 crore through NTPC, while NMDC offer earned Rs 9,925 crore.
"Traditionally, LIC and public sector banks have been the back-ups in any large financial crisis. The point is that it was government's money which changed coffers, nothing else," said a senior analyst with a leading consultancy firm.
The total investment by LIC so far this year is around Rs 20,311 crore. Compared to last year, the government has made huge profits through the public offers of companies such as Coal India to rise around Rs 21,000 crore. It is on course to raise the targeted Rs 40,000 crore this year, with issues of IOC and ONGC lined up in the coming months.
LIC made an investment of Rs 1,496 crore in primary issues of private firms last year, although LIC invested around Rs 30,000 crore in the secondary market during the period, the market value of LIC's investments rise to 322,634 crore at the end of 2009-10 against a book value of Rs 189,653 crore.