A money-back policy for insurers?

Indian private life insurers want a part of their additional capital to be treated as a notional loan. This raises major legal, accounting and ethical issues, says Venkatachari Jagannathan.

Chennai: The promoters of Indian private life insurers now want a money-back policy for themselves. They say that a part of the additional capital infused by them should be treated as a notional loan, with a first charge on the future surplus. They want Section 49 of the Insurance Act 1938 to be amended accordingly.

Section 49 lays down that bonus to policyholders can be declared only out of the surplus shown in the life fund / valuation balance sheet. The ratio in which the surplus is to be shared between the policyholders and shareholders is also prescribed in the law. In the case of participating / with profit policies, it is 90:10 in favour of policyholders, while in the case of non-participating / without profit policies, the shareholders get the entire surplus.

At a time when private life insurers are selling unit-linked policies that are not participating, the sudden need for amending the law is what piques many. Further, the first charge on any surplus is tax. Can a provision be made to the contrary? This is another question that lingers.

Be that as it may, the fact is that though they commenced operations with a minimum capital of Rs100 crore, most private life insurers have infused substantial sums as additional capital. While part of it is towards the solvency norms, the major portion is towards meeting start-up expenses and for declaration of bonus to policyholders.

It is a fact that during the first couple of years, any life fund will be negative. Recognising this, the Insurance Act does not stipulate that a life fund should always be in positive figures. All that a life insurer has to ensure is that the life fund and the shareholders' fund are together in excess of the valuation liability.