At the core of LIC’s appeal lies two well-nurtured perceptions: One, LIC uses people’s money for people’s welfare. Two, LIC, unlike the private-sector insurers, is trustworthy and will never renege on the claims of policyholders, since it is government-owned.

Given these, LIC has little incentive to function in any manner other than as a public sector behemoth in its business lines, which are all highly regulated. Evidently, there are vested interests and political support for maintaining its status quo . But LIC also faces quite a few challenges, even though its dominance in the conventional life insurance market continues — its market-share (new conventional non-linked business) was 75.6 per cent in terms of number of policies in 2019.

The announcement of the government’s plan to list LIC after an IPO and to disinvest 10 per cent of its stake can be seen as a continuation of its policy of insurance sector reform. LIC’s IPO will have critical implications for the government’s disinvestment programme in 2020-21.

Is LIC really special?

A section opposed to this move has sought to make a case that although LIC is government-owned, it operates more like a trust than as an entity tasked to make profit for its shareholders. This point of view has two arguments: One, the government’s frugal equity contribution in LIC — only ₹5 crore since inception till 2011-12, when it was raised to ₹100 crore. Two, LIC recycles 95 per cent of its surplus (profit) earned in the mainstay of its business — namely, life insurance on participation (profit-sharing) basis for the benefit of its policy-holders.

The neat narrative to project LIC as a kind of unique organisation with a goal to provide life insurance to all and sundry and, therefore, not comparable with its competitors is an attractive one, albeit with many defects. For one, its low level of capitalisation is not a virtue but an indication of a very low risk buffer for LIC. For another, the law mandates that all insurers should keep at least 90 per cent of surplus for the benefit of participating policyholders.

The government’s policy to retain an additional 5 per cent of LIC’s surplus for its policyholders is seemingly prudent, but it cannot be construed to imply a quantum difference in LIC’s protection of policyholders’ interest vis-à-vis its competitors. As regards deployment of their funds, all life insurers, including LIC, are governed by the same regulatory guidelines and the perception that the money of policyholders is safer with LIC or, for that matter, even a minor dilution of the government’s ownership control in LIC is fraught with the risk of misuse of public money is plainly wrong.

Financial performance

LIC’s record of business expansion and financial performance has been less than stellar for several years. Even in conventional insurance, its growth rate lags far behind those of its competitors. During 2018-19, for example, private insurers posted growth of 12 per cent in individual business vis-à-vis LIC’s 5 per cent and 36 per cent in group business against LIC’s 10 per cent. LIC’s product offerings in other segments involving a variety of savings and investment plans have had limited customer appeal.

Its business growth in general annuity, pension and unit-linked products has been lacklustre during the last few years, a poor performance feat that is brought to sharp relief by the fact during 2017-18 and 2018-19, policy liability under unit-linked schemes fell by about 16 per cent and 18 per cent respectively. As against this, LIC’s competitors had 52 per cent of their business in unit-linked products.Not surprisingly, during those two years, the share of premium income from products other than conventional life insurance was close to zero for LIC.

Post 2010, private sector life insurers shifted their strategy for a more diversified product-mix, in the wake of regulatory changes for unit-linked policies. The recent changes in India’s demographic profile underpinned this shift: The insurable population is expected to touch 750 million in 2020, with life expectancy at birth rising to 74 years. The share of the population above 65 years is expected to increase from 6 per cent in 2015 to 9 per cent by 2035 and further to 15 per cent by 2055.

These features, and a growing middle class, promise a huge potential for expanding the so-called ‘protection’ business and significant opportunities for retirement and pension-based products through innovation and use of digital distribution modes. But LIC has been left behind in product innovation.

It cannot take shelter behind its public sector status and achievements in discharging social responsibilities. The perils of such an approach are well-known by now, as evidenced by the decline of a good number of public sector banks.

For the last several years, LIC didn’t produce any surplus in the revenue account in any business activity, excepting conventional life insurance on participation basis. The quantum of surplus as a proportion of its premium-collection income has remained stagnant at around 0.7 per cent for the last three years. For a comparison, this ratio for its main competitors was around 5 per cent. The entire surplus in the revenue account is being paid as dividend to the government, with no appropriation for purposes like augmenting the fund for future appropriation (FFA). Restricting dividend payouts to government at 5 per cent of valuation surplus is, in reality, a virtuous act occasioned by necessity. LIC’s current profitability wouldn’t allow for more.

LIC’s level of capitalisation is minuscule compared to major competitors. Its solvency ratio at 1.60, though slightly better than the regulatory minimum of 1.50, is way lower than its major competitors. The shareholder’s equity as of end-March 2019 was a paltry ₹655 crore vis-à-vis its balance sheet size of ₹31 lakh crore. Although its liability towards its policyholders is required to be protected by policyholders’ funds, LIC faces many risks for which a buffer can only be provided by the shareholder’s equity. In fact, LIC’s capital is grossly inadequate even to cover its operational risk.

Despite low shareholder’s equity, LIC has made several strategic investments in seven subsidiaries/associates and joint-ventures using non-linked policyholders’ fund aggregating ₹25,127 crore. These include ₹24,000 crore for acquisition of IDBI Bank’s 51 per cent stake in 2019. While such uses of policyholders’ fund didn’t cause any regulatory breach, they fail the test of prudence, since these investments are guided by the shareholder’s strategic objectives which are at odds with the ‘safety first’ objective for the policyholders.

Road ahead

The move to list LIC is a welcome decision. Whether it will improve LIC’s governance and efficiency is anybody’s guess in view of two important imponderables: Will the government allow LIC’s board to function independently and if LIC’s investment function will operate on professional lines? The case for optimism is not too strong, if the experience of listed public sector banks is any guide. Nonetheless, it feels good to think that the first step for reforming LIC has been taken.

Through The Billion Press. The writer is a former central banker and consultant to the IMF

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