Chennai: The curtains on the solvency margin issue of the country's leading life insurer, Life Insurance Corporation of India (LIC), seems to have come down for the present.

Recently, Insurance Regulatory and Development Authority (IRDA) chairman C S Rao said that LIC needs an additional capital infusion of around Rs 10,000 crore to meet the solvency norms. The corporation has already taken care of the norms to the tune of Rs 3,500 crore and it needs to take care of the remaining Rs 6,500 crore. According to Rao, LIC has submitted that the solvency norms will be met by 2004.

But it is strange that the additional capital requirement has come down by half rather suddenly. According to the initial reports, LIC was said to require a fresh capital infusion of Rs 20,000 crore to satisfy IRDA's solvency norms.

There is another set of figures, this time from LIC, on the subject. In an internal communication, LIC says the corporation has a solvency margin shortfall of Rs 5,400 crore to be met by March 2004. According to the communication, LIC was to have a solvency margin of Rs 10,796 crore at the end of March 2002.

After taking into account its own funds of Rs 5,525 crore (equity capital: Rs 5 crore; general reserve: Rs 85 crore; other reserves: Rs 5, 435 crore) the shortfall amounted to Rs 5,271 crore. With a Rs 3,500-crore provision made last year, the actual deficit was just Rs 1,771 crore.

Since IRDA norms stipulate that the solvency amount should be 150 per cent of the minimum solvency margin, a shortfall of Rs 5,400 crore is perceived. From Rs 20,000 crore at one end to Rs 1,771 crore at the other end, the variance will baffle anybody.

Nevertheless, is there anything to be read behind the newspaper reports doubting LIC's solvency levels? Perhaps there is, in the guise of lucrative consultancy contracts that may lead to recommendations like restructuring / bifurcation of LIC into smaller entities, leading to further consultancy assignments.

The short-run agenda could be the abolition of the sovereign guarantee offered to policyholders since the formation of LIC in 1956. Looking further, there will be a demand to corporatise the postal life insurance operations — now run by the postal department, a central government arm with liabilities assumed by the government.

Though LIC in all its years of existence hasn't approached the government to realise the guarantee, private insurers are finding it irksome at the market place. Already, voices are being heard that sovereign guarantee makes the playing field uneven. Enron can have sovereign guarantee but not LIC from its owner, seems the argument.

Fortunately the news reports about LIC's solvency margin didn't create a scare among its policyholders to besiege LIC offices to surrender their policies. That shows the kind of goodwill that this public sector company enjoys among the Indian public. The same cannot be said of other private entities. Not long ago, a small report in a Gujarati newspaper about the health of ICICI Bank resulted in a nationwide run on the bank's deposits.

Unlike the Reserve Bank of India, the banking regulator which clarified that ICICI Bank is healthy and depositors need not worry about the safety, IRDA curiously kept its mouth shut for a long time. Only now that the regulator says the solvency margin is a technical requirement and there is no hole in LIC's financial position.

So what is this solvency margin? Simply put, it is the stipulated excess of assets over liabilities of a life insurer. This is calculated based on the business done by an insurance company and its assets and liabilities. As the life insurers business grows, fresh capital has to be infused to meet the solvency norms.

In India the solvency margin stipulation came into operation with the passage of the IRDA Act. Prior to that, it was only LIC that transacted life insurance business under a corporate structure and the question of infusing additional capital did not arise all these years as it was able to meet all its commitments out of its own funds.

Policyholders need not worry about their safety as LIC has assets with a market value that can pay off its liabilities with ease. In terms of assets, the corporation owns real estate for which the market value will be anything over Rs 10,000 crore (book value: Rs 800 crore). It is a pity that LIC earns very low rental income and pressure lobbies prevent it from increasing the same. Similarly, the difference between the market value and the book value of all its investments (real estate, securities) will be around Rs 50, 000 crore.

The corporation's request to revalue its assets marginally upwards was turned down by IRDA. Even a 20-per cent upward revaluation of its assets would take care of the solvency margin requirements. According to industry experts, in developed markets, solvency margin is calculated after revaluation of the assets. It is a different matter that despite this, almost all the multinational life insurance companies (many of them have a presence in India) have been downgraded by the global rating agencies.

If one takes into account the various parameters that measure the efficiency of a life insurer, like the cost ratio, claims ratio and the quality of assets, LIC ranks ahead in all these aspects. Industry experts opine that LIC can effortlessly meet the solvency norms just by reducing its returns/bonus rates reflecting the lower interest regime.

But the issue of solvency will continue to crop up for sometime to come — for various other reasons — as the additional capital infusion could be possible only after amending the LIC Act. Perhaps the corporation will look at alternatives like issuing preference share capital or other similar instruments just to meet a technical requirement.