The Life Insurance Corporation of India (LIC) is a unique insurance institution in the world. The policymakers had two objectives in mind while establishing LIC: provide a secure insurance against risk and at the same time, offer a people-friendly saving instrument.
Therefore, a hybrid saving-cum-risk coverage product was innovated. The new approach proved to be popular and the LIC’s business rapidly expanded. Though the Government of India had invested only Rs 5 crore, the total life fund today is Rs 34 lakh crore.
Now comes the most important twist in the tale: The LIC invests the life fund and from the net return, 5% is given to the government as dividend and the rest distributed among policyholders as bonus. The business model of LIC was that of a trust holding the life fund of policyholders and distributing the net profit among them. This is what makes LIC unique.
Now the Centre wants to monetise the value of the enterprise and appropriate it by expanding the shareholder base to private players. No consultations have been held with policyholders, who really are the true owners of the economic behemoth that LIC is. Most of the policyholders are also unaware of the fundamental change in the character of LIC that is being brought about.
Already IRDA has brought about two changes. One, it has decreed that only the net profit on participating policies (i.e. policies with saving components) needs to be distributed among policyholders. For the private companies, only around 30% of the policies are participating policies. In other words, it has bifurcated life fund and non-participating policies (i.e. policies for purely risk coverage) are not liable to contribute to bonus.
Further it has reduced the proportion of the net return to be distributed to policyholders 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 favour of private insurers in the guise of attempting to provide a level playing ground to the new entrants. It even went to the extent of derecognising some of the key products of LIC, throwing its business into confusion.
The IRDA is supposed to be the custodian of the interests of policyholders. The valuation of LIC by consultants has been prepared not from the perspective of policyholders but from that of 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.
The privatisation of 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 privatised LIC regime, to maximise 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 the US folded up.
The business focus of LIC can shift away from ordinary people and rural areas. In 2021, the average premium of LIC policy was Rs 16,156 and that of private insurance Rs 89,004. In contrast to private insurance companies, more than 60% of the branches of LIC are in smaller towns with 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 programmes at low premiums, attractive fixed deposit schemes and through special ventures for self-help groups. With the ending of cross subsidies, future such schemes would be jeopardised.
Why should the Central government undermine a successful business model that has been built up over the last seven decades? The usual explanation of public sector inefficiency is utterly hollow in this case because even after the entry of the 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 Central government, unmindful of the social benefits, its assured annual dividend and control over vast financial resources is pushing forward the privatisation agenda. The only reason is the prospect of receipts from the sale of LIC shares. It is so peeved by the poor record of privatisation so far that it 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? Policyholders 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 policyholders, a share in the disinvestment is offered. What percentage of the 42 crore policyholders can also become shareholders? It is an eyewash. 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—the policyholders—wake up, the lifestyle changes of LIC, necessary for privatisation, may prove difficult and even impossible.
T M Thomas Isaac
Former Finance Minister of Kerala