There are critical consequences of allowing LIC a differing set of limits for investment. Most impacted will be the policyholder who subscribes to a particular product and is under the impression that LIC will back it with a certain set of assets in keeping with the regulatory guidelines. These regulatory guidelines decide whether bearing the risk is prudent or not, rather than allowing the risk to be concentrated in one particular sector or segment. This is an assumption the policyholder makes. So, when LIC invests in a certain kind of equity or debt and that decision is based on the fact that it is a government offering rather than because there is a market for that kind of paper, it affects policyholder interest. Media reports have pointed out that on such investments made by LIC, especially recently, the corporation has suffered a loss of almost Rs 5,000 crore. So to that extent the policyholder suffers.
When the insurance sector was opened up, it was decided that there would be a level playing field as far as regulations for all players was concerned. As it is, there is a certain amount of arbitrage in this regard. LIC does not have the capital that is normally essential to meet the regulator’s basic solvency requirements. It has a capital base of Rs 5 crore and the balance amount if there is any capital involved is in the form of a sovereign guarantee. Each and every product offered by LIC is also guaranteed by the sovereign. In doing so, what really happens is that the market looks at LIC products differently—as an extension of the sovereign. The other private insurers offer products out of the solvency and capital that they have brought in. What this means to the policyholder is that since the sovereign is offering the guarantee, a large part of the yield is taken away. What you are left with is a low-risk, low-return kind of instrument.
Till about 3-4 years back, neither LIC nor the private sector insurance companies were investing in such huge amounts. The absolute amounts are very different because LIC’s base is much larger. But here we are referring to the percentage terms applicable to all insurers, the regulator-established level playing field. Now we find a scenario where such disinvestments are rising but we do not find the private sector insurers buying these instruments at all. So what does that mean? The question is whether in the normal course of evaluation, would LIC have bought such assets? Is it buying these assets because they are government offerings and LIC is seen as an extension of the government?
There are other associated issues—a regulator must have independence. And the government should not step in as regulator in this manner. Today it’s investment guidelines, tomorrow it could be product or agency guidelines. The government may tomorrow say it wants everything different for LIC. All of this is only going to put the private sector insurers and policyholders at a distinct disadvantage apart from impacting the sector.
Partner and national industry leader for global financial services, Ernst & Young; All views are personal. E-mail your columnist: ashvin.parekh AT in.ey.com
L I C is perhaps, relevant overseas, even though they might not be operating overseas. They had certain policies pertaining to insurance, which were not practiced in Europe, and North America, if elsewhere. I mean, their polices were not exactly as liberal as those in the west, but no one in India complained, under the premiership of Indira Gandhi. Insurance companies in the west must not have complained about the policies under which LIC undertook insurance, but they must have been disappointed at the clientele, or most of them, then. Everyone in India was insured by LIC, and most of the people who were insured, weren't very 'affluent'. Today, the why's and any other reasons, for the polices of LIC especially in the past, have some relevance, if not at all, even in the west. It appears, it was govt. practice, that claims were looked into with a certain priority. This must be now, too.
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