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.