Wednesday 31 August 2016
facebook.com/Outlookindia twitter.com/outlookindia digimag.outlookindia.com instagram.com/outlookindia youtube.com/user/OutlookMagazine

Jump, Says Gun

The question is, In a normal course of evaluation would LIC have bought such assets?

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.

Advertisement

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

READ MORE IN:
AUTHORS: Ashvin Parekh
SECTION: Business
SUBSECTION: Opinion
OUTLOOK: 04 February, 2013
Download the Outlook ​Magazines App. Six magazines, wherever you go! Play Store and App Store

Post a Comment

You are not logged in, please Log in or Register
  • Daily Mail
THE LATEST ISSUE
CLICK IMAGE FOR CONTENTS
OUTLOOK ON TWITTER
POLLS

In 1999, India and France entered into a $3.5 billion deal for the supply of these submarines. The first of the 6 subs is out on sea trials for the last three months and is to be commissioned later this year. At this stage, a newspaper in Australia has revealed secret data on the submarines, plausibly stolen from India. Indian Defence authorities have ruled out any pilferage of data from India.

POLL STARTED ON: Aug 26, 2016
Quiz
Brazil’s Rio de Janeiro is hosting the 31st Olympic Games from August 5 to 21. This is the first Olympics being held in South America and is going on even as a majority Brazilians are unhappy with their rulers. Here’s a quiz on some random Olympic facts and related trivia.
QUIZ STARTED ON: Aug 11, 2016
Advertisement