LIC gets solvency margin guarantee

The government will stand guarantee for meeting the required solvency margin of the Life Insurance Corporation of India (LIC). This assurance was given by the finance minister P Chidambaram yesterday in a closed-door meeting with the top brass of LIC in Mumbai.

This means that LIC will not need to be corporatised nor will it have to tap the capital market for funding through an initial public offering (IPO).

The government is expected to write to the Insurance Regulatory and Development Authority (IRDA) stating that should any calamity strike LIC in terms of having to meet claims, the government will give its full financial support, said LIC officials.

This is similar to the government having supported the Unit Trust of India (UTI). "However, such a situation is unlikely to arise. Moreover, if we are allowed to revalue our assets, we can easily meet the required capital through hidden reserves," added officials.

The government's decision to provide guarantee will give a boost to bonus returns of policyholders, which has been falling for the past two-three years.

This stems from the fact that a large portion of the solvency margin was being met through policyholders' surplus funds. For the year ended March 31, 2004, the total surplus distributed amounted to Rs 9,500 crore, which was distributed between policyholders and the government. Had LIC not provided for solvency margin, an additional Rs 3,500 crore could have been distributed to policyholders, said LIC sources.

With LIC growing at the rate of 60 per cent in terms of new business income, it needs to ensure adequate solvency margin as per the norms laid down by the regulator.

Solvency margins are calculated at four per cent of the reserves (that is the liabilities the insurance company could face) plus 0.3 per cent of the sum at risk. LIC has to date tackled provided Rs 14,000 crore towards the required solvency margin as on March 2004 for the business underwritten," said S B Mathur, chairman LIC.

This accounts for 110 per cent of the solvency margin, against the requisite 150 per cent laid down by the IRDA. The total requirement stands at Rs 16,800 crore as on March 31, 2004, which was to be provided for by March 31, 2005. With the government standing guarantee for LIC, this may not prove to be necessary.