In the last five years, Life Insurance Corp. of India’s (LIC) investments in state-run banks and the government’s disinvestment programme have almost doubled, according to news reports. Moreover, of the total investments made by LIC worth ₹26.6 trillion, as of March 2019, ₹22.6 trillion went into the public sector and only ₹4 trillion went into the private sector, showed data from the Reserve Bank of India. While this may work in favour of some of the public sector undertakings (PSUs), it’s not clear how it will impact the customers of the insurer. Disha Sanghvi asks experts how this might affect policyholders.
Kapil Mehta, Co-founder, Securenow.in
Investments in PSUs should have high levels of disclosure
We should not hastily conclude that investing in PSUs is detrimental for LIC and results in lower returns to policyholders; the fact is that we do not know the answer. However, as LIC is 100% government-owned, even the perception of possible conflict of interest should be removed by maintaining an arm’s length between LIC and the government.
Investments in PSUs should be treated like related-party transactions with a high level of disclosure. The performance of these investments vis-a-vis the benchmarks needs to be transparently published.
The other important aspect is that returns on life insurance products need to be communicated in a way that policyholders can transparently make out what they are. This can be done by expressing bonuses as returns on premium so that they can be easily compared with other options. This will create market pressure on all insurers to generate competitive returns. Unfortunately, such comparisons are not readily available to policyholders today.
A public listing of LIC is another tool to create transparency.
Deepali Sen, Certified financial planner and founder partner, Srujan Financial Advisers
Inefficiencies may impact returns of policyholders
The government’s reliance on LIC to invest in PSUs to compensate for the shortfall in their revenues seems to have gone up. Out of the current investments of LIC in PSUs, 90% of them have happened in the last five years. LIC seems to have become the lender of last resort to the government.
From lending a helping hand in many of the government stake sales in state-owned firms or public sector banks to bailing out fund-starved sectors such as railways, road and power, the insurer has been at the forefront of many investments in the public sector.
This does not bode well for LIC’s policyholders as these investments have not happened based on merit per se but more as an obvious diktat by the government.
A recent case in point is the stake increase in state-owned IDBI Bank through an infusion of ₹21,000 crore. The massive losses wiped out most of the infusion, which in turn called for another round of infusion. It is a matter of time when these inefficiencies will start reflecting in the performance of LIC, in turn affecting the returns of policyholders.
Premanshu Singh, Chief executive officer, Coverfox.com
Policyholders can be assured that claims will be honoured
The central government’s reliance on using LIC as a backup plan for bailing out PSUs is not new or unheard of. As far as safeguarding a policyholder’s interest is concerned, regulations put in place by the Insurance Regulatory and Development Authority of India (Irdai) do provide for adequate protection.
As per the guidelines of Irdai, LIC requires to maintain adequate solvency margins to pay the claims as and when they arise. Although solvency margins for LIC are lower than that for other private insurers, in case of an emergency, the government will infuse the funds to manage it. Solvency margins are the core capital requirements that an insurance company has to maintain in order to successfully honour the claims that arise from time to time.
The pumping of money by LIC into various PSUs increases the risk but the policyholders can be assured that their claims would be honoured. The government has in the past relied on LIC to make its disinvestments successful. Even after making hefty investments for bailing out PSUs, LIC has managed to stay above the mandatory solvency margin ratio of 1.5.
Vishal Dhawan, Certified financial planner and founder, Plan Ahead Wealth Advisors
Only a strong investment process can help customers
Policyholders who are diligently contributing their premiums into insurance products that have a combination of investment and insurance, or insurance products that are predominantly investment-oriented tend to do so as they may not have the expertise to manage their money and use third-party managers like insurers to manage on their behalf.
When premiums are invested, they need to be allocated to businesses that have high corporate governance standards, are well-run, accountable to shareholders, and are available at a significant discount to their fair value.
A strong investment process based on the above parameters is likely to help policyholders benefit from a robust fund management process from a longer-term perspective.
Unfortunately, not all investments that have been made over the last five years are likely to meet these expectations of policyholders, and thus they may need to diversify across multiple investment managers as a part of their risk management process. They also need to ideally separate out their investment and insurance needs.