Govt may amend LIC Act to raise capital

The government is planning to amend the Life Insurance Corporation Act to enable it to raise its share capital base from the present Rs 5 crore to levels in the rest of the industry.

The Insurance Act mandates a minimum share capital of Rs 100 crore. With growth in business, private insurance companies have injected additional capital to meet expenses and solvency margins.

Senior finance ministry officials said that an amendment to the Act would be considered.

As per the Insurance Regulatory and Development Authority Regulations 2000, the solvency margin for LIC works out to Rs 10,796 crore (Rs 107.96 billion) in March 2002.

The state life insurer has been able to meet this amount to the extent of Rs 9,025.03 crore (Rs 90.25 billion).

However, on a more cautious note, Irda has advised all insurance companies to maintain 150 per cent of the solvency margin. This will trigger a hike in shareholder capital, which is in line with international practices. Companies require frequent capital inflows in the first five to seven years to meet solvency margins as they write new businesses.

Based on LIC's past performance and business written over the last 46 years, the required solvency margin works out to Rs 15,909.41 crore (Rs 159.09 billion). The Irda has written to LIC that based on its valuation for the year ended March 31, 2004, it should achieve a RSM of Rs 15,909.41 crore (Rs 159.09 billion).

LIC officials stated that the corporation had met the RSM to the extent of Rs 9,025.03 crore (Rs 90.25 billion), leaving a balance of Rs 6,884.38 crore (Rs 68.84 billion) to be met by August 2004.

LIC has informed the government of the shortfall of Rs 6,880-odd crore (Rs 68.80 billion), which can be met either out of the government's share of the surplus funds or by way of additional capital.

LIC also proposes to suggest to the insurance regulator to permit it to mark-to-market a portion of the government securities maturing in the next two to three years. If allowed, this will help the state insurer to cover part of the solvency requirement.

"Ultimately LIC is a government-backed institution. If anything happens to LIC, the government will support it," union minister of state for finance (banking, insurance & expenditure) Anandrao Vithoba Adsul said.

It is an old institution where the common people have reposed faith in it, he added.