LIC set to meet solvency margin by March

The Life Insurance Corporation of India (LIC) plans to meet the entire 150 per cent solvency margin by March this year.

This means LIC will put in an additional Rs 9,000 crore by the end of the year, in addition to Rs 12,000 crore it has already set aside for the solvency margin.

The calculation is in accordance with LIC's past business written over the last 47 years.

The Insurance Regulatory and Development Authority (IRDA) had given LIC five years to meet the required solvency margin, which amounts to Rs 7,000 crore for business written till date.

But LIC has made so much money in a booming stock market that it will meet its solvency margin in March, well ahead of its five-year deadline.

With the stock market booming, LIC has been busy encashing its investments. An LIC executive told Business Standard that the corporation hoped to book Rs 3,500 crore profit by the end of 2003-2004.

"We have booked about Rs 3,000 crore to date," he said, adding that it was easier for LIC to meet the solvency margin today when the market was favourable and the corporation was faring well despite competition. In a depressed market, it is be more difficult to add to the required reserves.

The corporation has already met the 100 per cent solvency margin, which corresponds to the capital adequacy ratio stipulated for the banking industry.

The solvency margin is calculated at 6-8 per cent of the new business done each year, plus a certain percentage of the total business.

The IRDA, on a more cautious note, has advised all life insurance companies to meet a 150 per cent solvency margin, known as the required solvency margin.

LIC will need to provide about Rs 2,000 crore annually for new business. Further, the corporation also proposes to provide Rs 7,000 crore for the required solvency margin.

LIC continues to hold the view that the IRDA's demand for it to meet a 150 per cent solvency margin is "grossly unfair" considering the hidden reserves of the corporation in the form of real estate.

This is in addition to the fact that LIC's government securities portfolio if revalued at market rates would far exceed their book value.

Moreover, all LIC policies have government backing in the form of guarantees, making it practically redundant for the corporation to provide the required solvency margin.