No insolvency bailout for LIC

Regulator says guarantee will upset market equations

In a first of its kind, the Insurance Regulatory and Development Authority (IRDA) is set to turn down the sovereign guarantee offer made by the Centre to help meet the required solvency margin of the Life Insurance Corporation of India (LIC).

"We would not like to accept the government guarantee," IRDA Chairman CS Rao told  Business Standard. The move can also mean that policy holders may have to be content with a lower level of payouts going ahead.

Rao pointed out that the move to reject the assurance of the central government was dictated by the need to create a level playing field in the life insurance segment.

However, the regulator was willing to grant LIC more time to meet the 150 per cent solvency margin, said Rao.

"As there is no serious threat to LIC in its ability to meet the required solvency margin, we are willing to give the insurer time till 2006 or 2007 to meet the norm. It will be discriminating against other players if LIC gets advantage of the government guarantee," said Rao.

The move may also mean that LIC policy holders will get lower bonus payments going ahead. At present, LIC meets a large portion of the solvency margin through policy holders' surplus funds.

In 2003-04, the total surplus distributed amounted to Rs 9,500 crore. LIC sources said the insurer could have distributed an additional Rs 3,500 crore if it had not provided for the solvency margin.

As LIC is growing at 60 per cent, it needs to keep aside capital to meet the solvency margin as laid down by IRDA.

The regulator had no intention of relaxing the existing 'rigid norms' till the strength of insurance companies and strong corporate governance norms were established, said Rao.

"Ultimately, the capital needs to come from policyholders' funds and there should be no discrimination in the norms that apply to LIC and to other private insurance companies," said Rao.

The move to turn down the sovereign guarantee can also mean that the drive to corporatise LIC may gather steam, enabling the insurer to come out with an initial public offering to meet the solvency margin.

LIC had provided Rs 14,000 crore or 110 per cent of the required solvency margin by March 31, 2004, on a retrospective basis. The total requirement stands at Rs 16,800 crore and the corporation had been initially given time till March 31, 2005.

The solvency margin is calculated by adding up 4 per cent of the reserve (that is the liabilities the insurance company may face) and 0.3 per cent of the amount at risk. With IRDA not too keen on accepting the guarantee, the life insurance behemoth will need to continue to meet the norm through surplus capital available with it.

Level playing field

• A fallout of the move can be lower levels of payouts to policy holders
• The regulator is willing to grant LIC more time to meet the 150 per cent solvency margin
• LIC meets a large portion of the solvency margin through policyholders' surplus funds