INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

GOVT WON'T WITHDRAW GUARANTEE TO LIC

 The 16 crore policyholders of Life Insurance Corporation (LIC) can heave a sigh of relief with the government planning to continue with its guarantee for these policies. Fearing an erosion in value if the sovereign cover is withdrawn, the government has decided against discontinuing it. “Too much is at stake, we are not withdrawing the guarantee,” sources said. At present, the government guarantees payment of the sum assured and bonuses on all LIC policies.

   Withdrawing the guarantee was debated by the finance ministry for some time after the insurance regulator recommended a withdrawal of sovereign guarantee to the LIC policies to ensure a level-playing field vis-a-vis private players, who do not enjoy such cover. While extending sovereign guarantee to LIC does not have a direct bearing on the fiscal deficit, it adds to the fiscal pressure of the government since it is classified under contingent liability. The government is currently reviewing the LIC Act, 1956. It is planning to bring the amendments to the Act by the end of this year. Though a government guarantee has existed since 1956, there had been no cause for invoking the guarantee. LIC has a share capital of Rs 5 crore, but has managed to remain in business on the strength of the sovereign guarantees backing its commitments.

To restructure LIC a couple of years ago, Deloitte & Touche Tohmatsu India, the consultant hired by the insurer, had said that the government guarantee is quasi equity, which should be replaced with actual equity. But experts see no argument. Experts feel that while it may not be legally possible to withdraw the guarantee on policies that have been already issued, the government can withdraw its cover on future policies.

   Also linked to the amendment of the LIC Act is a plan to enable LIC to set up separate reserves for solvency margin on a par with private insurers. Under the LIC Act, 95% of the surplus earned goes to the policy holders and 5% to the government as dividends. The surplus does not go to the corporation. Amendments to the LIC Act will also enable LIC to raise its paid-up capital from Rs 5 crore to Rs 100 crore, as in the case of private insurers.