The curtains on the solvency margin issue of the country's
leading life insurer, Life Insurance Corporation of India
(LIC), seems to have come down for the present.
Insurance Regulatory and Development Authority (IRDA)
chairman C S Rao said that LIC needs an additional capital
infusion of around Rs 10,000 crore to meet the solvency
norms. The corporation has already taken care of the norms
to the tune of Rs 3,500 crore and it needs to take care
of the remaining Rs 6,500 crore. According to Rao, LIC
has submitted that the solvency norms will be met by 2004.
But it is strange
that the additional capital requirement has come down
by half rather suddenly. According to the initial reports,
LIC was said to require a fresh capital infusion of Rs
20,000 crore to satisfy IRDA's solvency norms.
There is another
set of figures, this time from LIC, on the subject. In
an internal communication, LIC says the corporation has
a solvency margin shortfall of Rs 5,400 crore to be met
by March 2004. According to the communication, LIC was
to have a solvency margin of Rs 10,796 crore at the end
of March 2002.
taking into account its own funds of Rs 5,525 crore (equity
capital: Rs 5 crore; general reserve: Rs 85 crore; other
reserves: Rs 5, 435 crore) the shortfall amounted to Rs
5,271 crore. With a Rs 3,500-crore provision made last
year, the actual deficit was just Rs 1,771 crore.
Since IRDA norms
stipulate that the solvency amount should be 150 per cent
of the minimum solvency margin, a shortfall of Rs 5,400
crore is perceived. From Rs 20,000 crore at one end to
Rs 1,771 crore at the other end, the variance will baffle
there anything to be read behind the newspaper reports
doubting LIC's solvency levels? Perhaps there is, in the
guise of lucrative consultancy contracts that may lead
to recommendations like restructuring / bifurcation of
LIC into smaller entities, leading to further consultancy
The short-run agenda
could be the abolition of the sovereign guarantee offered
to policyholders since the formation of LIC in 1956. Looking
further, there will be a demand to corporatise the postal
life insurance operations now run by the postal
department, a central government arm with liabilities
assumed by the government.
Though LIC in all
its years of existence hasn't approached the government
to realise the guarantee, private insurers are finding
it irksome at the market place. Already, voices are being
heard that sovereign guarantee makes the playing field
uneven. Enron can have sovereign guarantee but not LIC
from its owner, seems the argument.
news reports about LIC's solvency margin didn't create
a scare among its policyholders to besiege LIC offices
to surrender their policies. That shows the kind of goodwill
that this public sector company enjoys among the Indian
public. The same cannot be said of other private entities.
Not long ago, a small report in a Gujarati newspaper about
the health of ICICI Bank resulted in a nationwide run
on the bank's deposits.
Unlike the Reserve
Bank of India, the banking regulator which clarified that
ICICI Bank is healthy and depositors need not worry about
the safety, IRDA curiously kept its mouth shut for a long
time. Only now that the regulator says the solvency margin
is a technical requirement and there is no hole in LIC's
So what is this
solvency margin? Simply put, it is the stipulated excess
of assets over liabilities of a life insurer. This is
calculated based on the business done by an insurance
company and its assets and liabilities. As the life insurers
business grows, fresh capital has to be infused to meet
the solvency norms.
In India the solvency
margin stipulation came into operation with the passage
of the IRDA Act. Prior to that, it was only LIC that transacted
life insurance business under a corporate structure and
the question of infusing additional capital did not arise
all these years as it was able to meet all its commitments
out of its own funds.
not worry about their safety as LIC has assets with a
market value that can pay off its liabilities with ease.
In terms of assets, the corporation owns real estate for
which the market value will be anything over Rs 10,000
crore (book value: Rs 800 crore). It is a pity that LIC
earns very low rental income and pressure lobbies prevent
it from increasing the same. Similarly, the difference
between the market value and the book value of all its
investments (real estate, securities) will be around Rs
50, 000 crore.
request to revalue its assets marginally upwards was turned
down by IRDA. Even a 20-per cent upward revaluation of
its assets would take care of the solvency margin requirements.
According to industry experts, in developed markets, solvency
margin is calculated after revaluation of the assets.
It is a different matter that despite this, almost all
the multinational life insurance companies (many of them
have a presence in India) have been downgraded by the
global rating agencies.
If one takes into
account the various parameters that measure the efficiency
of a life insurer, like the cost ratio, claims ratio and
the quality of assets, LIC ranks ahead in all these aspects.
Industry experts opine that LIC can effortlessly meet
the solvency norms just by reducing its returns/bonus
rates reflecting the lower interest regime.
the issue of solvency will continue to crop up for sometime
to come for various other reasons as the
additional capital infusion could be possible only after
amending the LIC Act. Perhaps the corporation will look
at alternatives like issuing preference share capital
or other similar instruments just to meet a technical