LIC Chairman S.B. Mathur: Putting up a brave front

DELOITTE'S RECOMMENDATIONS

» 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

In 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 corporatise it.

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 deadline."

"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 and Tohmatsu

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 at LIC.

Will Guaranteed Return Weigh LIC Down?
Deloitte's Take: No, LIC is capable of sustaining existing guarantees

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.

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 Well?
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 holder.

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 Managers?
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.