Saturday, December 16, 2006

Govt guarantee for LIC

Genre: Insurance, Money, IRDA, India
Length: 1 Page

Should Government of India withdraw sovereign guarantee its has been giving to the insurance policies issued by target="_blank" rel="nofollow">Life Insurance Corporation (LIC)?

Private insurance companies are desperately trying to get this guarantee lifted. What does it mean to insurance policy holders? This post attempts a brief analysis of this scenario from an investor perspective.

LIC has been the sole operator in Life Insurance business till the sector was opened up to Private players. LIC enjoyed a monopoly till then and had already built a strong customer base, was operating under a good profit, and even after decade since private players stepped in LIC has retained leadership in the business.

What is this Government Guarantee?

LIC is wholly owned by Government of India and was established under LIC Act 1956 according to which Govt of India will be giving sovereign guarantee for the Sum assured and Bonus promised, for the policies sold by LIC. This means that if you buy a LIC policy, there’s 100% assurance that you’ll get whatever minimum benefits guaranteed, even if LIC goes bankrupt.

The private players don’t have this advantage; hence they’re failing to snatch investors from LIC. So they’re trying to get this sovereign guarantee removed, hoping that this will give them level playing field.

Insurance is a long term business which runs for decades. You invest something today and collect your returns 30-40 years later. It’s very much natural that our hard earned money lies in safe hands for decades at a stretch. Over 50 years, LIC has built this trust and has won investor’s confidence, so many people think ten times before considering a private company for insurance policies.

Private companies do not have the patience to wait for decades to build that trust and get returns on their investment. They need quick profit. Their operating costs are high and sales volume is low, add to these there’re strict IRDA regulations and a fierce competition among private players, so LIC’s popularity, market capitalization and government backing are making them envy it. While most of the prospective customers readily do business with LIC agents, because of LIC’s proven brand value, agents representing private insurance companies are often under the pressure to convince people that their company is better than LIC. If government backing is removed, they can try wooing investors highlighting this factor.

Will it happen and what if it happens?
Removing state guarantee to LIC needs amendment to LIC Act, hence it’s not an executive decision but rather a parliamentary one. LIC has grown strong enough to support itself even without state backing, so there’s nothing to worry about. But still, for an investor, state guarantee means added security hence its preferable that Govt guarantee is not lifted. With Govt guarantee its like currency note-acceptable everywhere, while without that it’s like Sodexho pass, acceptable and honored at less places.

When it comes to fund Management,compared to LIC, private insurers have highly paid fund managers whom investors may hope of being capable of deriving better returns, which should offset the high premium rates of these companies. So private players can bank on this and target young investors by giving them better returns coupled with better services.

For some extra info on these click target="_blank" rel="nofollow">here


Raveesh Kumar said...

I strongly believe that state guarantee should not be removed.

Shrinidhi Hande said...

I too agree with that

Natasha said...

Thanks for writing about this informative blog. It helped me a lot.

Amor Lytle said...

Thanks for the information about this Really nice Post.