Plunder of LIC Policy Holders’ Future Income

March 23, 2022
Dr TM Thomas Isaac

Preparations are complete for the largest ever Initial Public Offering (IPO) in India. 5% of the shares of the Life Insurance Corporation of India (LIC) will be placed in the market, once the turmoil generated by the Ukraine crisis settles down. India government expects to mobilize around ₹ 60,000 crores from the IPO. If 5% share sale can mobilize so much, one can imagine the dreams of Indian government from the eventual privatization of LIC.
When an investor buys the shares of LIC, he or she, is calculating how much would be the future income flow and its net present value. In other words, India government is selling the future income flows from LIC for an upfront payment today. Little understood aspect of this transaction is that it is not the future income flow of the government but the future income flow of the policy holders that is on the sale block. To understand this mystery, you must unravel the unique nature of LICs business model.

Business model of LIC

The LIC is a unique insurance institution in the world. The policy makers had two objectives in mind while establishing LIC: Provide a secure insurance against risk and at the same time, provide a people friendly saving instrument. Therefore, a hybrid saving cum risk coverage product was innovated. The new approach proved to be popular and LIC business rapidly expanded. Though government of India had invested only ₹ 5 crores the total life fund today is ₹ 34 lakh crores.
Now comes the most important twist of the tale: The LIC invests the life fund and from the net return 5% is given to government as dividend and the rest distributed among the policy holders as bonus. The business model of LIC was that of a Trust holding the life fund of the policy holders and distributing the net profit among them. This is what makes LIC unique.

Now the government of India wants to monetize the value of the enterprise and appropriate it by expanding the shareholder base to the private players. No consultations have been held with the policy holders who really are the true owners of the economic behemoth that LIC is. Most of the policy holders are also unaware of the fundamental change in the character of LIC that is being brought about.

IRDA’s nefarious games

Already, the Insurance Regulatory & Development Authority (IRDA) has brought about two changes. One, it decreed that only the net profit on participating policies (i.e. policies with saving components) needs to be distributed among the policy holders. The private insurance companies predominantly deal with nonparticipating policies while the opposite is the situation in LIC. In other words, it has bifurcated the life fund and non-participating policies (i.e. policies for purely risk coverage) are not liable to contribute to the bonus.

Further it reduced the proportion of the net return to be distributed to the policy holders from 95% to 90%. As private shareholders increase this would be further reduced. The LIC has so far avoided compliance, but it will have to fall in line.
The IRDA has generally been biased in favor of private insurers in the guise of attempting to provide level playing ground to the new entrants. It even went to the extent of derecognizing some of the key products of LIC throwing its business into confusion.

The IRDA is supposed to be the custodian of the interests of the policy holders. The valuation of the LIC by consultants has been prepared not from the perspective of the policy holders but from the perspective of the future investors. The listing of LIC has been approved by IRDA in record time without due diligence. The key objective of the regulator seems to be to assure the investors that the value of their investment will be given full protection and necessary lifestyle changes will be made in LIC.

Sovereign guarantee to policies

The privatization of the LIC will undoubtedly adversely impact the sovereign guarantee to the policies. Given the general risk aversion of ordinary people guarantee was indeed an important factor behind the popular trust in LIC. In the privatized LIC regime, to maximize profits, the investments would necessarily shift to high profit but risky share and bond markets. As a result, risk business can become a risky business. Between 1990 and 2020, 82 insurance companies in USA folded up.
Social security of the poor and the marginalized

The business focus of LIC can shift away from ordinary people and rural areas. In 2021 the average premium of LIC policy was ₹ 16156 and that of private insurance ₹ 89004. In contrast to private insurance companies more than 60% of the branches of LIC are in smaller towns of less than 1 lakh population.

In most parts of India, the poor have hardly any social security protection. LIC caters to them with several social security insurance programs at low premiums, attractive fixed deposit schemes and through special schemes for self-help groups. With the ending of cross subsidies future such schemes would be jeopardized.

Why should central government undermine a successful business model that has been built up over the last 7 decades? The usual explanation of public sector inefficiency is utterly hollow in this case because even after the entry of private sector LIC has successfully defended its market share.

In 2019-20 the total number of unfair business practice complaints in India in the insurance sector was 43,444 of which 90% were related to private insurers. It may be remembered that their share in the total business was only 34%. In 2021 the operating expenses for LIC constituted only 8.68% of the premium while that of private insurance companies was 11.72%.

The winners and losers

The central government unmindful of the social benefits, its assured annual dividend and control over vast financial resources is pushing forward the privatization agenda. The only reason is the prospect of receipts from the sale of LIC shares. It is so peeved by the record of retarded record of privatization so far, they may fix a very low price for the LIC shares. To ensure the success of LIC sale, foreign investors are also welcomed. This is sale of family silver for a pittance.
Who are the losers? The policy holders would lose a share of their bonus to pay dividends to the new shareholders. Their risk also would mount. 

So, who are the real winners? For sure, the financial investors who are eyeing the prospects of taking over the largest life insurance entity on a platter. To pacify the restive policy holders a share in the disinvestment is offered. What percentage of the 42 crores policy holders can also become shareholders? It is an eye wash. The control of LIC is going to shift to the new anchor investor group whose identity is not clear yet. They are the real winners.

But, if the real owners of LIC, the policy-holders, wakeup, the lifestyle changes of LIC, necessary for privatization, may prove difficult and even impossible. Something has started churning in Kerala. A state level convention of policy holders, employees and agents have launched a movement “Kerala United - To Save LIC”. It has the representation of all the mass and class organizations of all political parties other than BJP. The coming days are going to witness a unique social movement - mass movement of policy holders against privatization of LIC.