LIC may seek fresh equity to meet solvency norms

KOLKATA: Life Insurance Corporation of India (LIC) will seek fresh equity infusion from the Centre to meet its solvency margin norms if the government decides to withdraw the guarantee on its life insurance policies.

Solvency margin is the minimum excess of an insurance company’s capital over its liabilities. The Insurance Regulatory & Development Authority (IRDA) feels the guarantee should be withdrawn and the Centre is examining the proposal. This would, however, require an amendment to the LIC Act, 1956.

The minimum capital requirement for a private insurer is Rs 100 crore. All insurance companies, barring LIC, are required to regularly jack up equity to meet the minimum solvency norms as and when business grows.

For private insurers, the solvency margin is stipulated at 100%. However, the IRDA has fixed a 150% solvency margin for LIC since its equity base is a tiny Rs 5 crore. LIC is governed by LIC Act and is not required to maintain such capital infusion procedures. Solvency margin is calculated on the basis of a formula stipulated by IRDA. However, LIC has managed to increases it solvency margin to 120% and has sought more time to achieve the 150% level.

“At present, LIC’s capital base is a small Rs 5 crore and the LIC Act stipulates that 95% of profits should be redistributed among policy holders and 5% paid to the government as dividend,” an LIC director told ET.

“If the government amends the LIC Act and does away with the guarantee, we will request them to infuse fresh equity. The total quantum of funds that needs to be injected, however, is yet to be determined. It will be decided on the basis of LIC’s total assets and liabilities as well as the number of policies in vogue,” the LIC director said.

LIC policy-holders enjoy a sovereign guarantee which shields them from losing their sum assured, bonuses declared and on guaranteed additions in case LIC is unable to pay up. This provision, however, has never been used.