LIC shouldn’t invest in new businesses from reserves: panel

LIC shouldn’t invest in new businesses from reserves: panel

New Delhi: A parliamentary panel has asked the finance ministry not to amend the legislation governing Life Insurance Corp. of India (LIC) in any way that would allow the insurer to invest its reserves in new businesses, warning such a move would undermine the interests of policyholders.

“As investments in business ventures other than life insurance may involve the risk of incurring losses, the committee are of the view that such investments may not be allowed and the reserves, either fully or partially, be ploughed back into insurance business only," the parliamentary committee on finance said in its report, which has been tabled in Parliament.

The committee reached the conclusion after meeting all stakeholders to suggest changes to the finance ministry’s proposed amendments to legislation governing LIC.

The government introduced a Bill in the Lok Sabha in July 2009 to amend the law.

One of the proposed amendments was aimed at reducing LIC’s surplus, which has to be distributed to policyholders, from the current level of 95% to 90%.

The umbrella legislation for the insurance industry, The Insurance Act, 1938, says 90% of life insurers’ surplus can be distributed to policyholders. The current LIC legislation makes it mandatory to distribute 95% of the surplus.

A written submission made by the finance ministry on the proposed amendment said one of the reasons for the proposal to reduce the surplus was to allow LIC to create a separate fund, which could be used to invest in other businesses.

The finance ministry’s written submission on other businesses said: “These may be other class of businesses/businesses in other countries through SPVs (special purpose vehicles) or international companies."

LIC, in its written submission, had wanted to retain the existing rule of distributing 95% of its surplus to its policyholders.

It was not known if the finance ministry would accept the parliamentary committee’s recommendations or if the amendments in LIC’s legislation would be tabled in the ongoing winter session of Parliament.

The parliamentary committee on finance is made up of members from different political parties. The committee had submitted its recommendations in March.

The Central government is the sole shareholder of LIC and provides a sovereign guarantee backing the corporation’s insurance policies.

In 1956, the government brought together over 240 private life insurers and provident societies to form LIC through legislation.

Subsequently, LIC diversified into other lines of business such as mutual funds and housing finance. Some of LIC’s diversifications have needed subsequent financial help from the corporation, Mint reported on 15 December 2008 and 16 November 2010.

The parliamentary committee pointed to the poor track record of some of LIC’s subsidiary activities when it recommended usage of proposed reserves be restricted to its life insurance business.

“The committee are of the view that the amounts apportioned to the revenue/separate account should be utilized for insurance business only, which would contribute to the overall returns generated by LIC," the committee said.

The panel also suggested the finance ministry refrain from reducing the surplus that can be distributed to policyholders from 95% to 90%. The committee wanted the government to make sure LIC maximized returns to its policyholders.