LIC CAPITAL BASE MAY SWELL TO RS 100 CRHema Ramakrishnan/Mayur Shetty

Hyderabad/Mumbai: The government, which is pushing the legislation to hike the cap in foreign direct investment in insurance from 26% to 49%, is also set to usher in reforms in India’s largest financial institution, Life Insurance Corporation (LIC). It is vetting a proposal to make changes in the LIC Act to enhance the capital base of the corporation from Rs 5 crore to Rs 100 crore. The move will help LIC to comply with the minimum capital prescribed by the Irda Act, which states that no insurer can do business without a paid-up capital of Rs 100 crore. All insurance companies registered by the regulator have paid-up capital above Rs 100 crore. As their business grows, private insurers are required to bring in more capital to meet their solvency requirements. “A hike in the paid-up capital for LIC is aimed at providing a level playing field with private insurers,” said a senior government official. It is not clear whether the new capital will come from the government or from LIC’s own reserves. So far, LIC has been setting aside part of its surplus to build up the prescribed solvency market requirements. However, the moot question is whether a higher paid-up capital would mean that LIC no longer enjoys the government guarantee and some of the relaxations it current enjoys. At present, there is no clarity on this. LIC has not been able to plough back capital as it distributes its entire surplus in the life fund to policyholders and its sole shareholder, the government, in a 95:5 ratio. Its policies are also guaranteed by the government. As LIC does not have funds of its own, it has some relaxations on debt and equity exposures to a single company. It can invest up to 30% of its portfolio in a single company. In fact, LIC dipped into policyholder funds to pick up over 27% in Corporation Bank a few years ago after special permission from the government. Private insurers, on the other hand, can invest only up to 10% of their portfolio in a single company. The government is looking at changes in the investment regulations to remove the differential treatment between public and private sector insurers. Some years ago, consultancy firm Deloitte had suggested that the government guarantee for the liabilities of Life Insurance Corporation was in the form of quasi-capital, and ideally, this should be replaced with real capital. In the absence of a substantial shareholders’ fund, LIC has to turn to the government for funds to expand overseas operations.

Source: The Economic Times

OLD AND YOUNG, ALL ARE UNDER-INSURED: AJAY BAGGA, CEO, LOTUS INDIA AMC

Financial illiteracy remains a global problem, with the economically disadvantaged facing even more hurdles due to their situation and station in life. India suffers even more — as an emerging economy, as a victim of colonialism and as a poor nation with a huge population and limited resources.

However, any analysis needs to start with an acceptable definition. I define financial education as the ability to make informed judgements and take effective action regarding the management of money across the entire cycle of earning, spending, saving, investing, budgeting and passing it on. Opinions differ on how to define it, but there is consensus that financial education remains central to and is critical in achieving life goals of individuals.

India at present sees several unique challenges to the financial well being of its citizens. There are over 90 million senior citizens in India and a small proportion have fixed pensions that are inadequate in an inflationary environment. On the other hand, the 320 million strong young workforce needs and gets investment options that their parents generation never had in a closed economy.

All these combine to make the price of financial illiteracy huge. In fact, John Bryant, the founder of the financial education initiative ‘Operation Hope’ in the US described the roots of the subprime crisis thus: “Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy.” The write-off bill is already $492 billion as on August 5, 2008 and is projected to rise to as high as $2 trillion even before this crisis works out of the financial systems worldwide.

In fact, from corporate treasurers and chief financial officers to bankers, financial advisors and retail investors, all segments, all strata have shown deep financial illiteracy. In India, the foreign derivatives write-offs have highlighted the financial illiteracy of corporate officers, boards of directors, bankers as well as auditors. At an individual level, the older segments face the risk of outliving their savings, of landing in ‘retirement poverty’.

A grim portent of this is that 50 per cent of those aged 65 today will be hospitalised before their demise, yet a miniscule proportion has any medical insurance. The young run the biggest risk of dying or getting disabled too soon, yet they are massively underinsured. The situation is the same with financial products penetration, with 60 million rural households having no access to formal banking credit, and hence being in the clutches of usurious moneylenders. Financial literacy at a national level will go a long way in fixing many of these problems.

Source: Hindustan Times

BILL SOON TO ENABLE PUBLIC INSURERS TO RAISE CAPITAL

Bangalore: The government is expected to take up the insurance amendment Bill seeking to increase the capitalisation of the public sector insurers. Amendments to the General Insurance Business (Nationalisation) Act (GIBNA) of 1972 have remained in cold storage since 2004, as long as the Left parties were part of the ruling coalition. With the exit of the Left parties from the ruling coalition, highly placed sources said, the passage for making amendments to the Act was now clear.

The proposal was to insert an enabling provision in GIBNA that would allow PSU insurers to raise capital either in the form of equity or long-term subordinated bonds. The provision would also allow for dilution of government equity in the insurance companies to either 74 or 51 per cent.

Bonds issue
Insurers are currently not allowed to issue bonds, though globally insurers raise capital through such bonds. The sources said that the amendments to GIBNA were now before the Group of Ministers. Currently, the Government holds the entire paid-up equity capital amounting to Rs 550 crore in the four non-life insurance companies, after General Insurance Corporation transferred its holdings in 2004.

The sources said that insurers have for long been pushing for improving the capitalisation, either through direct induction of equity from the government or through an enabling provision in the statute.

The sources said that this was essential for them to raise their solvency. Although all the 4 PSU insurers - New India Assurance Company Limited, National Insurance Company Limited, Oriental Insurance Company Limited and the United India Insurance Company Limited - are well within the prescribed solvency margin, most of them had been hit by the decline in premium collections during the last few months.

The prescribed solvency margin is currently 150 per cent. Solvency margin implied the excess of capital (equity plus general reserves) and the value of assets over the insured liabilities. Besides, sources also said that proposals to improve their capital through sell-off of equity assets had been shelved , after the equity markets dropped sharply.

Divestment
Consequently, the strongest of the four insurance companies was likely to be picked up for divestment this financial year itself. One divestment was also expected serve as a price discovery mechanism for general insurance companies for the rest of the PSU insurers. Currently, there are no insurance companies listed on the domestic stock exchanges.

The sources said that divestment would help the companies raise their solvency ratios to above 200 per cent. The improved solvency margin would in turn allow the companies to aggressively pursue a premium growth of at least 10 per cent per annum. Besides, the sources said, the capitalisation would also help reduce the reliance on foreign reinsurance, for meeting the solvency.

Sources said that this year, with the PSU insurers switching focus from top line to bottom line, private sector insurers had increased their market share to about 42 per cent in the first quarter of this financial year. Besides, private sector companies such as ICICI Lombard have shifted from corporate and big ticket insurance business to retail business where the loss ratios were low. The consequent high retentions made retail lines highly profitable, where PSU insurers are not yet large players.

Source: The Hindu Business Line

Pirate’s Work Injuries

After many years at sea, a pirate decided to retire. Since he had suffered injuries on the job, he thought that he should collect on his worker’s compensation insurance. He had a wooden leg, a hook where his right hand should be and a patch over his right eye. The agent assured him that he would be compensated if the injuries were work related.
“How did you get the wooden leg?” asked the agent.
In a booming voice the pirate replied, “Me and me mates were on the high seas when the boom swang ’round and knocked me into the sea where a shark bit off me leg.”
The agent replied, “That is certainly work related. How did you lose your hand?”
“Well matey, me and me mates were on the high seas when the boom swang ’round and knocked me into the sea where a shark bit off me hand,” said the pirate.
“That’s also work related. Now how did you lose your eye?” asked the agent.
The pirate replied, “Well matey, I was laying on the deck one balmy day catching some rays when this seagull flew by and dropped his duty right in me eye!”
“What does that have to do with the loss of your eye?” said the agent.
“It were the first day with me hook!”

Life Insurance