The extent of sovereign guarantee for state-owned Life Insurance Corp.’s obligations may be capped through the government’s proposed amendments to the LIC Act.
The proposed amendments would empower the government to determine the extent of sovereign guarantee, but not remove it, said a government official who didn’t want to be named.
Sovereign guarantee essentially means that the government will make good LIC’s commitments in case the corporation is not in a position to do so.
The possibility of a cap on sovereign guarantee flows from another amendment, which earmarks a portion of the surplus for creating a reserve fund, and also from LIC’s growing investments. LIC, which has about 85% of the market share in life insurance when measured in terms of premiums collected, has a corpus that exceeds the balance sheet size of most banks. LIC investments, as of 31 March 2006, were Rs463,771 crore, according to the regulator’s last available annual report.
As the size of LIC’s investments grows—its total premium collections grew by 18.25% and 20.85%, respectively—in 2005 and 2006, the potential liability of the government in the event the sovereign guarantee has to be exercised keeps growing.
The amendments to the LIC Act are part of an overall move to amend different insurance laws to bring them in line with current business needs. A move towards reducing the extent of sovereign guarantee for LIC is in line with what private-sector players are demanding and also with the idea of providing more autonomy for the corporation, said Samir Bali, a director at consultancy firm Ernst & Young.
A proposed change in LIC Act is a fund to help the corporation meet the prescribed solvency margin needs.
Solvency margin is the extent the regulator thinks a life insurance company’s asset value should exceed the value of liabilities. Solvency margin gained popularity in the 1970s as regulators thought there should be a cushion from fluctuations in market conditions.
The fund is proposed to be built by diverting a part of the surplus—the excess of assets over liabilities that is calculated by the actuary. Currently, LIC is required to set aside at least 95% of the surplus to policy holders and the balance goes to the government. The amendment would reduce that minimum to 90% and the balance divided between the reserve fund and the government.