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Photo: Mint

What does partial divestment in LIC mean for its policyholders?

  • In her budget speech, FM Sitharaman proposed to divest a part of the government’s stake in LIC through an IPO. Will the listing of LIC, do any good to its policyholders? Most importantly, will the sovereign guarantee that policyholders get continue? Disha Sanghvi and Nilanjana Chakraborty talk to four experts to find answers

In her budget speech, finance minister Nirmala Sitharaman proposed to divest a part of the government’s stake in Life Insurance Corp. of India (LIC) through an initial public offering (IPO). It seems like the government is trying to make the most of the brand value of LIC, given that it is one of the few remaining profit-making entities owned by the state. Will the listing of LIC, which is the country’s largest financial institution with assets under management of close to 30 trillion, do any good to its policyholders? Most importantly, will the sovereign guarantee that policyholders get continue? Disha Sanghvi and Nilanjana Chakraborty talk to four experts to find answers:

Abhishek Bondia, Principal officer and MD, Securenow.in

Abhishek Bondia, Principal officer and MD, Securenow.in
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Abhishek Bondia, Principal officer and MD, Securenow.in

Listing will boost LIC’s efficiency and thereby policy returns

The listing of LIC will be a positive move for policyholders. The benefit will, however, be indirect. As a 100% government-owned entity, LIC’s financial health is largely outside the scrutiny of the financial markets.

Investment returns for traditional policies are dependent on the insurer’s performance. Such plans form a big portion of LIC’s book. Unlike unit-linked insurance plan (Ulip) investors, who have a clear visibility on the daily performance of underlying funds, the endowment policyholders’ visibility is limited to annually declared bonuses.

Listing will allow analysts to monitor LIC’s governance. LIC will come under Sebi’s direct watch and will have to comply with the requirements meant for other listed firms. Such compliance is likely to strengthen its overall corporate governance, financial and investment discipline. Over time, this will increase its efficiency and it may deliver higher returns to policyholders.

Amol Joshi, Founder, PlanRupee Investment Services

Amol Joshi, Founder, PlanRupee Investment Services
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Amol Joshi, Founder, PlanRupee Investment Services

Peers will be under pressure to improve pricing and features

Any company going public is good news for stakeholders since it ensures higher transparency, better governance, more disclosures and scrutiny from the investors.

However, LIC is not a typical company. LIC has in the past invested in the equity markets to stem its fall. After being listed, LIC will be answerable to public shareholders and, hence, will be a prudent investment decision, which is good for policyholders. LIC will also become more competitive. This will put pressure on its peers to innovate, benefitting policyholders in terms of pricing, product features and services.

LIC policyholders enjoy a sovereign guarantee on the sum assured and the bonus declared. This has been one of the main selling points for LIC policies. The proposed “partial" divestment, in all likelihood, will ensure that the majority stake is still with the government, thereby continuing the sovereign guarantee.

Rohit Jain, Head of India, Willis Towers Watson

Rohit Jain, Head of India, Willis Towers Watson
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Rohit Jain, Head of India, Willis Towers Watson

Less govt interference will be a positive for LIC’s financial health

For LIC, it will be a significant task to enhance the quality of asset management given that the government sometimes is reliant on it to bail out PSUs, without delving deep into the fiscal prudence of these assets. Being under scrutiny, the quality of asset management by LIC will be enhanced as the government’s influence on its asset management will reduce.

Further, LIC services a few state-sponsored schemes which have underwriting challenges on the commercial front. With the IPO, these services might fall into place, improving the overall stability of LIC.

In a nutshell, with less federal interference, LIC will be more accountable with strong governance protocols, which will be a positive for its financial health. However, the sovereign guarantee element currently enjoyed by each LIC policyholder might cease to exit after the IPO. Some policyholders may then find it hard to trust LIC.

Joydeep K. Roy, Partner and leader, insurance, PwC Indi

Joydeep K. Roy, Partner and leader, insurance, PwC India
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Joydeep K. Roy, Partner and leader, insurance, PwC India

If sovereign guarantee continues, policyholders won’t perceive risk

So far, LIC has operated almost like a mutual insurance company by passing on most of the earnings to the policyholders and keeping very little as profits, despite having a massive operation.

The listing of LIC is a positive move which will result in transparency of the corporation in public view, sparking renewed interest in the insurance industry in international markets. Government-owned General Insurance Co. of India is already listed, so the process and transparency will not be any different.

As long as sovereign guarantee over the maturity proceeds and sum assured continue, policyholders won’t perceive any risk. The return on policies may have to be moderated to boost profitability and technical reserves in the face of shareholder and analyst scrutiny.

It is not clear how much of the company will be diluted. So, the opportunity for the general public to pick up equity in LIC in the IPO may be limited.

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