Life Insurance Corp. of India (LIC), the country’s largest financial institution with an asset base of Rs. 12 trillion, is running a valuation deficit of around Rs. 14,000 crore in three plans of its guaranteed-return annuity policies—Jeevan Dhara, Jeevan Suraksha and Jeevan Akshay. Not all plans under these three brands are affected.
There are at least 1.3 million customers of these three plans, but none will be affected.
In a parallel development, all investments made by LIC during fiscals 2007-08 and 2008-09 are under the government’s scanner, following Complaints made about its investments in a few companies.
The finance ministry is also closely looking at the exposure of its subsidiary, LIC Mutual Fund Asset Management Co. Ltd (LIC MF), to Liquid and money market schemes that led to a Loss of Rs. 120 crore. “The unitholders have nothing to worry. We’ll fix the responsibility and take stern action (against those responsible), said a ministry official familiar with the development, who asked not to be identified.
Another person, who also did not want to be identified, said “heads will roll” in LIC MF.
While LIC MF has disclosed its loss in its half-yearly earnings and reported this to the capital market regulator, the notional loss or valuation deficit of LIC’s three guaranteed return pension schemes is not mentioned in its balance sheet as the insurer does not disclose its profits or losses across segments.
These plans were launched in the 1980s and the 1990s with assured returns of 11-12%, but with the drop in interest rates the actual yield on investments is much less than what investors have been earning. They were launched under the Jeevan Dhara, Jeevan Suraksha and Jeevan Akshay brands. Subsequent schemes launched under the same brands are not suffering from any notional losses.
These three loss-making old schemes are annuity plans, offering periodic payments after the retirement of a policyholder. They address the longevity risk and in some cases, inflation risk in a limited manner.
As the payout phase is usually long and uncertain, such schemes require the matching of assets and liabilities over a fairly long period.
“The valuation gap varies according to the movement of interest rates. In future, it can widen or even shrink. At the current interest rate scenario, the net present value of the deficit for these schemes, which will expire after a few decades, is around Rs. 14,000 crore,” said an LIC official, who asked not to be named.
Apart from the interest rate trend, the mortality rate will also have a bearing on the actual loss that LIC will suffer eventually. Mortality rates have been progressively coming down and this means longer payouts to the investors.
The LIC official said that there is no plan to discontinue these schemes and added that LIC has a solvency margin of Rs. 46,000 crore and this is being used to take care of the valuation gap. “We’re using surpluses to make good this gap and not using other policyholders’ money,” he said.
A senior Insurance Regulatory and Development Authority (Irda) official said the regulator would not have approved these LIC schemes had it been in existence when they were launched. “There is indeed a deficit… This is not a good practice. We’d not have cleared such products if they were to come to us for approval,” the Irda official said, asking not to be identified.
“It would be unwise for LIC to build up such losses in their accounts. Pension funds are required to be handled very carefully,” he added.
If interest rates keep falling and the people covered under these LIC policies do not claim their incomes, the losses could build up further. “If it calls for a corrective action, we’d certainly act,” said Irda chairman J. Hari Narayan.
Irda came into being in 1999.
The schemes
LIC introduced two personal pension plans, a deferred pension plan by name Jeevan Dharaand an immediate pension planby name Jeevan Akshay in 1987-88, offering 1% assured return per month. The government had allowed premium on these two plans up to Rs. 40,000.
Both plans had managed to attract millions of customers due to tax incentives offered. Investments in such schemes were exempted from one’s income while computing tax. Demand for the schemes continued till 1992, when the government withdrew the tax incentive.
In 1996, once again, LIC introduced a deferred pension plan, Jeevan Suraksha. The government allowed premium of up to Rs. 10,000 for the policy.
The Latest data available for these schemes shows that till March 2003, LIC had nearly 1.3 million customers covered under them.
Source : Live Mint
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