At a time when the safety of the investors money
is a major hassle, the S P Subhedar committee, in its
first set of recommendations, has suggested scrapping
the central government guarantee to Life Insurance Corporation
of Indias (LIC) policyholders.
The central government
as LICs owner has been offering this guarantee since
1956. The postal life insurance is the other business
where the central government bears the liability to policyholders.
The Subhedar committee
was constituted by the Actuarial Society of India (ASI)
to recommend changes in the insurance laws to the Law
Commission of India. The committee consisted of consulting
and appointed actuaries from life, non-life and reinsurance
companies but didnt have any actuarial representation
Under the LIC Act,
the central government guarantees to settle all the policyholders
dues (sum assured and the bonuses accrued) in cash. This
aspect is one of the unique selling propositions of LIC
agents. And the private life insurers find this a formidable
hurdle to cross at the market place.
Coming on the heels
of Unit Trust of Indias (UTI) US-64 bailout by the
government, the committees recommendation is likely
to generate a lot of heat and debate among the general
Says ASI president
Liyaquat Khan, who is a committee member: The real
safety or comfort for policyholders is the insurers
solvency margin - not sovereign guarantee that cannot
be foreclosed or actualised and which could be altered
by the government by amending the Act.
Given the fact
that LIC has been charging higher rates despite the drastic
improvement in life expectancy, the need to encash the
guarantee didnt arise for anybody. Moreover all
the private life insurers have fixed their premium rates
based on LICs mortality table and only through reckless
management can a life insurance company can go bust in
As the owners,
the promoters of private life insurance companies are
free to offer such guarantees. One need not copy the regressive
measures of other markets, says an industry source.
Similarly with LICs bonus rates being far higher
than the others, the committee favours the payment of
bonus out of shareholders funds kept specifically
for that purpose.
To safeguard policyholders
money, the Subhedar committee has suggested imposition
of an industry level levy on the insurers and intermediaries
which would form a fund to be governed by a separate board
as in the UK. The corpus could be used to restore 80-90
per cent of the benefits of policyholders when an insurer
The board would
secure continuity of insurance to the extent of 90 per
cent of the policy value. Otherwise the board will pay
the policyholder a sum equivalent to 90 per cent of the
value of his policy.
In case of general
insurance the UK board also enables 100 per cent settlement
of compulsory insurance claims to individual policyholders
and 90 per cent under other non-compulsory general insurance
claims. The board also helps arrange transfer of policy
obligations to another insurer, or returns the pro-rata
premium to all policyholders.
Though the idea
of creating a corpus has been around for quite sometime
here, the debate was on managing the same. Both the Insurance
Regulatory and Development Authority (IRDA) and the government
are desirous of managing it.
One of the recommendations
is to dispense with the concept of policyholders
director in insurance companies and introduce an independent
director. An independent director is a better alternative
than policyholders director. The latter is bound
to fail as it happened when a worker representative was
nominated to the board of public sector units some years
ago, reasons Khan.
With regard to
solvency margins to be maintained by insurers the ASI
committee feels that apart from the minimum margin there
should be a control level; beyond which the regulator
gets the warning signals.
The committee also
wants the powers of IRDA to be restricted in some areas
like regulating investments, merger and acquisitions.
In investments, IRDAs control purview should be
restricted to the policyholders funds with the investment
of shareholders funds being outside the regulatory
Regulation of investments
may extend at best to only a portion of the shareholders
funds that corresponds to the control level of solvency
margin, apart from policyholders funds, the committee
With regard to
mergers, acquisitions and amalgamations, the committee
is of the view that the power to approve transfers should
lie with the court rather than the regulatory authority.
The committee wants a debate on the continuance of prohibiting
rebates by insurance agents and companies to procure business.
The committee also
wants LIC to assume the entire burden of financing schemes
promoting / regulating professional organisations. The
committee says insurers should be made to contribute certain
percentage of their underwriting profit or surplus rather
than the premium income towards this. This in effect will
take out all the non-life insurers and life insurers from
making contributions except LIC.
On the general
insurance side, while calling for dismantling of Tariff
Advisory Committee (TAC, the premium rate fixing body)
and Insurance Association of India, the committee calls
for scrapping of the 20-per cent compulsory cession to
General Insurance Corporation of India (GIC).
In addition the
report demands allowing foreign reinsurers to transact
business through their branch offices instead of forcing
them to incorporate a separate company under Indian laws.
entities shall match the domestic liabilities with domestic
assets, both valued in terms of applicable regulations
and shall maintain at all times a solvency margin as specified
and submit annual returns and other information in prescribed
format, states the report.
the capital structure the view is that the central government
should have the power to prescribe the minimum capital
and the nature of capital. It also recommends scrapping
of provision that requires insurers to keep a security
deposit - as the minimum capital required to start an
insurance company is Rs 100 crore.
Against the traditional
approach of dividing insurance business into life and
non-life the committee has recommended a division of two
categories - long term insurance business (which apart
from life insurance also includes linked long term insurance,
health insurance, capital redemption, pension, gratuity
and annuity and accident insurance) and general insurance
business (fire, marine, cargo/hull, motor vehicles, aviation,
general liability, accident and health and miscellaneous
The objective of
such classification is to achieve homogeneity of issues
needing redressal through legislation and regulatory processes.
However, the committee is of the view that there should
be an industry-wide debate on this kind of classification.
to the actuarial profession the committee wants a specific
provision in the act that offers protection to the appointed
actuary against any civil or criminal liabilities arising
out of responsibilities, obligations and duties of appointed