LIC policyholders likely to see their bonuses diminish

January 25th, 2009 - 11:19 am ICT by IANS  

Chennai, Jan 25 (IANS) Life Insurance Corp of India (LIC) policyholders have to brace up for a cut in bonuses as the insurer’s surplus could take a hit of around Rs.80 billion (Rs.8,000 crore/$1.60 billion) if the Indian government hikes its share in the surplus to 10 percent.Currently, LIC divides its surplus between policyholders and the government in the ratio of 95:5, a formula once applicable to Oriental Assurance Co - a private life insurer that was nationalised in 1956.

The government has sought to increase its share of surplus by amending Section 28 of the LIC Act through The Life Insurance Corp (Amendment) Bill 2008, now being studied by the Parliamentary Standing Committee on Finance.

“Shorn of actuarial calculations, the new surplus-sharing formula will increase LIC’s liability (amount kept aside in respect of a “participating” or “with profit” policy on a given date) by around 1.5 percent or around Rs.8,000 crore (Rs.80 billion). This will result in a corresponding decrease in the surplus,” said R. Ramakrishnan, a consultant actuary and a member of the Malhotra Committee on insurance reforms.

A with-profits policy (prevalent in Commonwealth countries) or participating policy (as in the US) is an insurance contract that figures in the profits of a life insurance company.

Ramakrishnan’s estimate seems to be on the conservative side. Other actuaries who did not want to be identified said LIC’s liability would increase by Rs.120 billion (Rs.12,000 crore/$2.44 billion) - reflecting a corresponding decrease in its surplus.

Currently, LIC’s bonus rate varies from policy to policy and ranges between Rs.40 and Rs.60 for every Rs.1,000 of sum assured.

The life insurer sells a sizeable number of participating policies even today.

As per the amendment bill, LIC can distribute 90 percent or more of the surplus to its policyholders and apportion a specified percentage of the balance to a separate account, the purpose of which will be spelt out by the government later.

The remaining surplus will be paid to the government as dividend.

Except for the surplus sharing percentage and the mention of the word ‘dividend’ as government’s share of surplus, the revised Section 28 is similar to the existing one in the LIC Act.

All these years, the Indian government has been getting its share of surplus in full without directing LIC to set aside some portion towards any specific purpose.

“The new surplus sharing formula should apply only to policies sold after the law is amended. Earlier, policyholders who bought their policies in the belief that their share of surplus will be 95 percent might approach the court if their pie is reduced,” industry officials told IANS on condition of anonymity.

Such a division can be possible only if separate accounts are maintained for old and new participating policies, but the difficulty is in apportioning the common costs between the two.

“Further, the returns for new policyholders as well as the government will be meagre as the investment portfolio will have to be built from scratch,” said Ramakrishnan, who used to be an executive director at LIC’s actuarial division.

The cascading impact will be on the goodwill that LIC enjoys, which in turn will stymie growth.

Questions emailed to LIC officials remained unacknowledged. They were also not available to give clarifications over telephone.

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