LIC policyholders to see their bonus diminish

LIC policyholders to see their bonus diminish

Wednesday, 28 January 2009, 04:22 Hrs   |    5 Comments
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Chennai: Life Insurance Corp of India (LIC) policyholders have to brace up for a cut in bonuses as the insurer's surplus could take a hit of around 80 billion (8,000 crore/$1.60 billion) if the Indian government hikes its share in the surplus to 10 percent.

Currently, LIC divides its surplus between policyholders and the government in the ratio of 95:5, a formula once applicable to Oriental Assurance Co - a private life insurer that was nationalised in 1956.

The government has sought to increase its share of surplus by amending Section 28 of the LIC Act through The Life Insurance Corp (Amendment) Bill 2008, now being studied by the Parliamentary Standing Committee on Finance.

"Shorn of actuarial calculations, the new surplus-sharing formula will increase LIC's liability (amount kept aside in respect of a "participating" or "with profit" policy on a given date) by around 1.5 percent or around 8,000 crore (80 billion). This will result in a corresponding decrease in the surplus," said R. Ramakrishnan, a consultant actuary and a member of the Malhotra Committee on insurance reforms.

A with-profits policy (prevalent in Commonwealth countries) or participating policy (as in the US) is an insurance contract that figures in the profits of a life insurance company.

Ramakrishnan's estimate seems to be on the conservative side. Other actuaries who did not want to be identified said LIC's liability would increase by 120 billion (12,000 crore/$2.44 billion) - reflecting a corresponding decrease in its surplus.

Currently, LIC's bonus rate varies from policy to policy and ranges between 40 and 60 for every 1,000 of sum assured.

The life insurer sells a sizeable number of participating policies even today.

As per the amendment bill, LIC can distribute 90 percent or more of the surplus to its policyholders and apportion a specified percentage of the balance to a separate account, the purpose of which will be spelt out by the government later.

The remaining surplus will be paid to the government as dividend.

Except for the surplus sharing percentage and the mention of the word 'dividend' as government's share of surplus, the revised Section 28 is similar to the existing one in the LIC Act.

All these years, the Indian government has been getting its share of surplus in full without directing LIC to set aside some portion towards any specific purpose.

"The new surplus sharing formula should apply only to policies sold after the law is amended. Earlier, policyholders who bought their policies in the belief that their share of surplus will be 95 percent might approach the court if their pie is reduced," industry officials told IANS on condition of anonymity.

Such a division can be possible only if separate accounts are maintained for old and new participating policies, but the difficulty is in apportioning the common costs between the two.

"Further, the returns for new policyholders as well as the government will be meagre as the investment portfolio will have to be built from scratch," said Ramakrishnan, who used to be an executive director at LIC's actuarial division.

The cascading impact will be on the goodwill that LIC enjoys, which in turn will stymie growth.

Questions emailed to LIC officials remained unacknowledged. They were also not available to give clarifications over telephone.
Source: IANS
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Reader's comments(5)
1: HI,

THis UPA government is nothing but a Government of cheats .They will do everything to squeeze the Middle class .
Posted by:Anil - 28 Jan, 2009
2: This is ridiculous with the inflation rate we are currently working on, its going to hit the investments of the common man. I dont see any point in looting the investments as well apart from the inflation.

Posted by:Sai - 27 Jan, 2009
3: What LIC pays to its policy holders is not worth to call it as BONUS. The government is only on to robbing the peoples money to meet its lavish expenses. Should be opposed...
Posted by:Ambadas - 27 Jan, 2009
4: There is no publicity to the move or the details of the bill...

It needs to be discussed and if necessary opposed..


Correct I aggreed with the Mouli...before taking any dici
sion or discussion common man or atleast every policy holders should taken in to confidence, as they are also share holders and base of LIC.

By taking decision directly to cut the bonuses is not right as policies taken by policy holders on the benifits which was highlighted and bonus is one of the essential criteria...either start new policies with the bonus but they can not take out the bonuses of existing policy holders.
Posted by:Sachit - 26 Jan, 2009
5: An occasion to kill the interests of the crores of policyholders of the GIANT LIC... or May be a ploy to stab in the back... Though struggling to maintain the market share, still the customer confidence in the mighty LIC is immense...

The Policyholders will be the losers... For a meagre 5 Crores investment, in 1956, The Government has been getting huge sum as its reward (conservative estimate abt 400 to 500 crores per annum)... (Legendary Golden Goose)

There is no publicity to the move or the details of the bill...

It needs to be discussed and if necessary opposed..

Posted by:NR MOULI - 26 Jan, 2009