|LIC Chairman S.B. Mathur: Putting
up a brave front
Corporatise LIC if the government wants to
pare its exposure
Do not cross-subsidise policy holders by
pooling all assets
Ring-fence assets of guaranteed products
Mark investment to market for a better reflection
of asset value
Set up SBUs for each category of products and policy holders
Formulate a policy for regular risk evaluation
of the portfolio
2001-02, 2 million-odd people signed up for LIC's three schemes:
Jeevan Shree, Bima Nivesh, and Jeevan Suraksha. Brilliant marketing?
Not exactly. At a time when banks were offering deposit rates between
6.5 and 7 per cent per annum, these schemes were guaranteeing annual
yield ranging from 10.5 per cent to 11 per cent. Little wonder,
then, that LIC mopped up a record Rs 10,920 crore in premium income.
The hitch, however, was that LIC needed to invest the money in instruments
that yielded at least as much. Did LIC manage to do that? We'll
never know, since LIC pools all its investments into one fund.
Although LIC has discontinued or relaunched
these schemes since, the misstep is symptomatic of what ails the
country's biggest life insurance company. It is stodgy, not savvy
enough, and opaque in large parts. That can be a dangerous situation
to be in when you cover 100 million lives for an assured sum of
Rs 10,80,987 crore, settle 1.43 claims every second, are faced with
new aggressive competitors, and when your growth of new premium
income is slipping, and average yield on investment is down too.
With UTI's US 64 disaster still fresh in mind,
the Finance Ministry commissioned consulting firm Deloitte Touche
Tohmatsu in June this year to do a health check of LIC. For four
months beginning June, a 12-member Deloitte team worked with a 15-member
LIC team to produce a three-part report on the corporation. While
bits and pieces of the report have emerged in the media over the
last several days, the details have remained a secret. After weeks
of chasing LIC and Deloitte, BT was finally able to get an exclusive
look into the major findings of the report. So, was LIC ever in
danger of going the UTI way? We'll let the man who scripted the
report, Deloitte's Executive Director, Ashvin Parekh, answer the
question: "The LIC review came at the right time. It was time
for LIC to stop the excesses. Otherwise, a few years later, it could
have become a UTI." Phew!
In the third week of October, LIC Chairman
Sunil Behari Mathur met Secretary (Financial Sector) N.S. Sisodia
along with Deloitte's Parekh to apprise him of the findings. Says
Mathur, seated in his spacious sixth-floor office at Yogakshema,
LIC's corporate digs in Mumbai: "The fact is there's nothing
alarming in the report." True, but there's enough in it that
damns LIC's past practices and rightly raises questions that should
worry policy holders. BT takes up four such key questions.
Is LIC Solvent?
Deloitte's Take: Sovereign guarantee is as good as cash,
but should the government want to pare its exposure to LIC, it should
Till two years ago, solvency for life insurance
companies meant that the value of their assets should be more than
the value of their liabilities. However, in 2001-02, IRDA mandated
a 150 per cent solvency margin. And since this margin is calculated
on the existing business plus the new business generated in the
current year, for LIC it meant having to provide for business done
over its 45-year history, plus the business done in the 45th year.
On the basis of 100 per cent solvency margin (the 50 per cent is
discretionary), LIC had to set aside Rs 10,200-odd crore in March
2002. Except for a shortfall of Rs 1,771 crore, LIC was able to
demonstrate solvency to the regulator. However, Rs 2,000 crore in
liabilities were added due to new business in 2002-03. LIC provided
for that too by March, 2003. Says Mathur: "As of end last fiscal,
we are 100 per cent compliant and well ahead of (IRDA's) March 2004
|"As of now LIC is
robust, but if the government has to come out of any liabilities
that may arise later, then it must go in for corporatisation"
Ashvin Parekh/Executive Director, Deloitte, Touche
However, if LIC were to meet the entire 150
per cent solvency margin (it has asked the government to be exempt
from the discretionary 50 per cent), it would have to rustle up
another Rs 6,000 crore. As far as policy holders are concerned,
they can take solace in the fact that the corporation is backed
by a government guarantee. Says Parekh: "As of now LIC is robust,
but if the government has to come out of any liability that may
arise later, then it must corporatise LIC." That would mean
cleaving it in two: One would be the commercial side of the business
with freedom to introduce, price and reprice products. The other
would be government funded and include social welfare schemes like
the Varishtha Bima Yojna, or insurance for farmers. Whether the
corporatisation actually happens depends on the government. At the
moment, the odds seem long since there is no apparent solvency crisis
Will Guaranteed Return
Weigh LIC Down?
Deloitte's Take: No, LIC is capable of sustaining existing
Possibly provoked by the entry of private players
into the industry, LIC aggressively marketed high-yielding products
in 2001-02. The most popular scheme (in terms of subscribers) was
Jeevan Shree, a limited endowment policy that guaranteed a 11 per
cent return per annum, and it mopped up Rs 3,000 crore as premium
income before it was withdrawn in January 2002. A New Jeevan Shree
was launched in March 2002 with a 9 per cent assured return, but
was withdrawn a year later. An equally aggressive pension scheme
Jeevan Suraksha, which guaranteed a 11 per cent return over 40 years,
collected Rs 2,560 crore between April and June 2001, when it was
discontinued. It made a return a month later, but with a lower guarantee.
As of now Jeevan Shree I guarantees a return of 6.5 per cent. Finally,
the third-most popular scheme was Bima Nivesh, a single premium
policy with a 10.5 per cent guaranteed return, which racked up Rs
5,360 crore before its withdrawal in June 2001. It made a return
too a month later, but with the guaranteed return knocked down to
9 per cent and has been since re-relaunched with 6.5 per cent guarantee.
| "There Is Nothing Alarming In The Report"
| A week after Deloitte presented its report,
LIC's chairman S.B. Mathur sat down with BT's to talk about LIC's health audit. Excerpts:
Q. How do you view Deloitte's report?
The report does not have anything alarming about
LIC. The reason why the report was introduced was that so
much has happened in the financial sector...interest rates
have dropped and there was a lot of talk about how LIC would
cope with it. The fm asked for an independent financial check
of all state insurance companies. The initial report has come
from Deloitte. We are examining the suggestions. But the fact
remains there is nothing alarming.
Q. LIC meets only 100 per cent solvency
margin and not 150 as stipulated by IRDA...
We have Rs 1,30,000 crore in government securities, whose
market value as on March 31, 2003, was Rs 1,80,000 crore.
Plus we have real estate, which Booz Allen Hamilton (a consulting
firm) said five years ago, has potential value of Rs 10,000
crore. Stockmarkets have gone up and so the book value of
unquoted investments is higher by Rs 10,000 crore. So, we
have offbalance sheet reserves of Rs 70,000 crore. Why provide
for 50 per cent discretionary margin?
Q. Why isn't LIC proactive in fund
Yes, it's essential to have dynamic investment management.
The secondary market operations have increased and we are
trying to leverage our debt and equity portfolio. Our equity
portfolio (9 per cent of total investments) has gone up (in
value) by Rs 10,000 crore since the markets have gone up.
Q. Is it true that LIC has only one
That's a price one has to pay for being in business for a
long time. Many actuaries have moved out. We have two actuaries;
the third one left on October 1, 2003. But we have 10 actuaries
who have passed about half of the total qualifying papers.
We are trying to build up the cadre and every year we take
100 to 200 actuarial apprentices.
As of now, seven products are on the watch list,
including Jeevan Asha II (7 per cent assured), New Jeevan Akshya
I (7.2 per cent), and Bima Nivesh triple cover (6.5 per cent). Two
dozen products have been either withdrawn or relaunched over the
last two years. Says Mathur: "The quantum of guaranteed products
is small (less than 7 per cent) in 2003." Parekh agrees that
the guaranteed part of the business is sustainable, provided LIC
"ring fences" those assets-that is, it makes investments
in keeping with the liabilities that will arise 10 or 15 years hence.
Is LIC Managing Its Money
Deloitte's Take: Could be better; end cross-subsidisation
of schemes and appoint separate investment managers for each product.
Historically, LIC has pooled all its assets
under various products and managed them like one big fund. But that
does not help maximise efficiency of investment, since a loss-making
investment can be easily made up by more profitable ones. While
Mathur says that some amount of cross-subsidisation is inevitable
in the Indian environment, Parekh says that pooling of risks must
end and that there must be no passing of risk from one set of policy
holders to another. Besides, Deloitte has recommended that LIC should
better match the investment risk with the profile of the policy
As part of its charter, LIC is required to
make social investments, including state government bonds, state
electricity boards, and water projects, among others. But Mathur
says that those form a small part of its investments (book value
as of March 2003) of Rs 2,65,044 crore. LIC holds Rs 1,30,000 crore
in government securities, the market value of which now is Rs 1,80,000
crore. Its investments in the stockmarket account for 9 per cent
of its total portfolio, and the current market boom has upped the
value of its holdings by Rs 10,000 crore. Adding this with LIC's
gains in real estate, Mathur puts its off-balance sheet reserves
at Rs 70,000 crore. However, as a practice, LIC does not mark its
investments to market since it holds the portfolio to maturity.
Deloitte wants the mark to market habit to be introduced.
Does LIC Have Smart Investment
Deloitte's Take: It needs a higher order of specialisation
In the insurance business, it is the actuaries
who determine the profitability of a scheme. So how many actuaries
does a corporation that has Rs 10,80,987 crore of cover on offer
have? Incredibly, just two. While LIC does take on 100-200 actuarial
trainees every year, its count of those who have passed at least
half of the qualifying papers is just 10. Mathur admits that this
is a soft spot: "In the last two years, the challenges have
multiplied with a number of people moving out or retiring. Now,
we have built a second line of defence at the executive level."
LIC may need a lot of fixing before top talent either stays or comes
in. Its compensation structure is a poor match to the ones being
offered by its private sector competitors. Its managers are not
market-savvy and need retraining, besides which the organisational
structure itself may need to be redone to focus on specialisation
and not geographies. "Since the external situation has changed,
LIC has to bring in a high order of specialisation," says Parekh.
The upshot of the report is clear: LIC is in
no immediate danger, but if it doesn't quickly enough plug the cracks
in its system, it may eventually cave in. Fortunately for LIC, unlike
UTI, there was a Deloitte to sound the fog horn. All that Mathur
has to do is to ensure that his corporation acts on the recommendations.