The Hindu Business Line : Insure guarantee

THE PROPOSAL TO do away with sovereign guarantee of sums assured under policies issued by the Life Insurance Corporation of India may not be such a great move, even if it is a long way from becoming a reality. The new Government taking over after the elections is unlikely to make this its immediate legislative priority. The public ownership of financial institutions is still largely an emotive issue among politicians and the coming elections are unlikely to throw up representatives with so radically a new profile as to make a consensus on the issue feasible.

A large policy holder base, any decision that seemingly exposes the interests of a large number of policyholders to the vagaries of the capital market is never easy. Then there is also the question how morally defensible would such course of action be when the Government sets the strategic agenda for LIC, appoints its nominees on the board and so on but baulks at taking any responsibility for the outcome of its actions. In other words, the restructuring of LIC's ownership must precede the decision to do away with financial guarantees rather than the other way about. Any player with a long-term commitment to the risk management market would be expected to make good on its promises even at the risk of loss of shareholder wealth as the damage to reputation in the event of a default would effectively end its chances of staying in the business. So, guarantees are implicit and hence explicit ones, as in the case of LIC, are really not issues from the perspective of a level playing field between public and private players.

In any case, the Government has not been rendering any service in this regard gratis. On the contrary, it has been doing rather well for itself. Under law, the Government gets a five per cent share out of the policyholder surplus which in 2002-03, fetched nearly Rs 500 crore — not a bad deal on an original investment of a mere Rs 5 crore when LIC was set up. Should the Government do away with the guarantee, it ought then to cease laying a claim to a share of the policyholders' monies. The elimination of the sovereign guarantee would reinforce the demand for a substantial additional capital infusion into LIC. Since the Government is not going to be able to find these resources, the policyholders will themselves have to chip in with higher appropriations of surplus as reserves which would have otherwise gone towards paying themselves larger bonuses. That should level the playing field for private players whose life funds cannot support any bonuses except with the injection of additional promoter contributions.

In fairness to the vast multitude of LIC policyholders, if the regulatory authority cannot countenance a situation of an under-capitalised public sector life insurance player then let the Government inject additional capital. Then the Government can pay itself any amount of dividend out of the surpluses that remain after setting competitive premium rates and declaration of policyholder bonuses. If, on the other hand, these are inadequate relative to the quantum of investments made, the Government always has the option of privatising its insurance business.

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