P G Dileep

Is LIC facing a natural death

The global and economic crisis had several impact on the Indian economy. Life Insurance Corporation and Indian banking industry were not affected since these were in the public sector. If UPA-II government would have succeeded in privatization of these sectors, the impact of the crisis in India would have been more severe. The doors of globalization were opened in 1991 on the pretext of economic strengthening of the country. The promise was that once the market is opened, the price rise will be arrested, economic stability will be strengthened, more employment opportunities will be created, India will grow as the number one economic power and the rupee value will go up much above the dollar.

When we are completing 20 years of liberalization, India is going to face the biggest economic crisis. If it goes like this, the possibility is that India will be the centre of the next global economic recession. The micro economic factors are not favorable to India. Inflation is never coming down–rather it is going on increasing. As a result of globalization, the rupee value against dollar came down drastically. Unemployment became very severe. Price rise went out of control. Whatever promises made during the time of globalization were not only not fulfilled, but resulted in the negative. What the government says now is that the globalization should be speeded up in order to have a fast progress. The intention is to give freedom to foreigners in the remaining sectors also.

As far as insurance industry is concerned the NDA government was in favour of amending the Insurance Bill which was strongly opposed by the UPA government in 2008. Now, when NDA came to power in 2014, they took initiative to present the Bill in Parliament. So it is proven that the two governments are the two sides of the same coin as far as economy of the country is concerned. The defective policies of the government and LIC in recent years has been leading to the destruction of LIC. The slogan of LICAOI is “SAVE LIC and PROTECT AGENTS”. We have been resisting the destruction of LIC and campaigning for LIC; at the same time struggling to protect the rights of agents over the years.

The Insurance Laws (Amendment) Bill - 2008, with a view to amend the Insurance Act 1938, the General Insurance Business (Nationalisation) Act - 1972 and the Insurance Regulatory and Development Authority Act - 1999, was introduced in the Rajya Sabha on the 22nd December, 2008.There are a total of 111 clauses in the Insurance Laws (Amendment) Bill - 2008. Since BJP raised objection, it was referred to the Finance Standing Committee on 14th September 2009 for examination and submitting a report. The Committee submitted its report on 13th December 2011. There were 31 MPs in the Committee. The Chairman of the Committee was Shri Yeshwant Sinha, the Finance Minister in the NDA regime. He was also responsible for the formation of IRDA. The Finance Standing Committee unanimously recommended against raising the foreign investment to 49%. Since the NDA is in power now and they themselves introduced the bill, it is quite natural that they cannot now accept the report. The alternate way they designed is to refer the report to a new Select Committee for their recommendation.

On 14th August 2014 the Bill was referred to the Select Committee consisting of 15 members, chaired by Dr. Chandan Mitra. The Select Committee submitted its report in the Parliament on 10th December 2014. It was not unanimous. There were 26 amendments recommended in the report. But it could not be discussed in the Rajya Sabha during its session. On 26th December 2014 an Ordinance was signed by the President of India. This has to be passed by the Parliament within six months.

If the bill is passed in the Parliament the effect is that the FDI in insurance sector will increase from 26% to 49%. This indirectly means that foreign investors will take the control of insurance industry. This will have an adverse effect on the Indian economy. Even now 26% of the Indian insurance sector is with the foreign companies. When it goes up to 49% there are a few problems. The FII route will be possible if companies are listed on the stock market and none of the insurance companies is listed. FII money will not appear in the company’s balance sheet. There is a possibility of using FIPB route to allow FDI to flow in insurance sector. We do not understand how the Foreign Investment Promotion Board (FIPB) can overcome the legislative pre-eminence of Insurance laws and the powers of the IRDA. As it is, the Act and IRDA regulations cannot allow an increase in FDI cap. A few Insurance companies are planning to enter stock market, but that is not going to happen immediately. Under the new Companies Act passed in 2013 the foreign companies will register subsidiaries under this Act. They can also open branches in India for re-insurance purpose or otherwise. Even if these companies buy a minimum of 2% share of any insurance company with 49% share, the foreigners will have the total control of that company.

We have sample case of ANP Sanmar, an Australian tie-up, which was closed ten years back. In the case of Tata-AIG, when AIG was facing a big economic crisis three years back, Tata gave an advertisement that AIG had only 26% share in the company and hence the policy holders need have no worry. This will indirectly

mean that if the company had more shares, it would have adversely affected the clients. This company has become Tata-AIA now, as Tata has left the collaboration with AIG. Tata has 74% and AIA 26% of the share. Tata is a company which has an asset value of Rs.5,27,047 crore, 5,40,000 employess all over the world and it has a standing of 140 years. It is beyond ones understanding as to why such a giant company needs 26% of foreign share in its insurance business. AIA is a company which is 90 years old and is the biggest insurance company in Asia pacific region. There is a hidden agenda behind the game. Tata who was the computerization agency for LIC has the complete data of the policy holders with them. If they have a foreign tie-up this data bank can be easily used to conquer the complete insurance business. It is at this time that the government has got passed an ordinance for the Insurance Amendment Bill 2008.

The Government has not so far made a scientific study of this sector. If such a study was conducted, it would have been proven that the Indian companies do not at all need such foreign partnership. This is because the country has giant industrialists like Tata. They have sufficient wealth in India itself and need not have to depend on a foreigner.

The difficult phase of de-growth continued in 2012-13 for Indian and foreign life insurance industry. Industry suffered de-growth of 6.32% in First Year Premium and LIC too came down almost at the same rate. In number of new policies, LIC achieved 2.88% growth, thereby saving the industry from a sharp de-growth due to decline otherwise suffered by the private sector. Our market share in Number of Policies increased from 73.02 % in March 2010 to 80.90 % in March 2012 and further improved to 84.4% in March 2013. Similarly, First Year Premium market share was 64.86 % in March 2010, increased to 68.7 % in March 2011 and further increased to 71.36 % in March 2012. We have sustained our FYP Market Share above 71% in 2012-13 also.

Share of first premium of SBI Life, the nearest competitor in new premium share, is 4.84%, ICICI Prudential 4.50% and HDFC Life 4.14%. FPI share of the other 20 life insurers together is 15.27%. Individually, each competitor may seem insignificant but collectively they have made a dent in our business.

In 2012-13 LIC settled 1.70 crore Maturity & SB Claims amounting to 49,642 crores. 7.26 lakh Death Claims amounting to 6,390 crores were also settled. Nearly 93.19% of total maturity claims were settled on or before the date of maturity and 94.34% of non-early death claims were settled within 15 days of intimation. Outstanding maturity claims was 0.49% while the outstanding death claims was 1.05%. This is the best performance in Death Claims in the last 11 years.

Total payments to policyholders aggregated to Rs. 1,12,911.82 crores. IRDA imposed penalties on 10 life insurance companies for various reasons. But LIC did never face any type of penalty.

LIC is also realizes its commitment and has introduced a micro-insurance policy meant for the financially weaker sections. It plans to sell insurance cover to people below the poverty line under social security group schemes such as Jana Shree Bima Yojana and Aam Admi Bima Yojana. It will offer free add-on scholarship benefit plans for the children of those covered under such schemes. Total coverage under Social Security Schemes has crossed 5 crore lives. About 1/3rd of our population would need coverage through group schemes. The vision of LIC is to give life insurance coverage to the whole population of India by 2020.The investment of LIC in government sector from inception till 2011-12 is shown below:-

According to a report by global consulting firm McKinsey and Co., life insurance premiums as a percentage of gross domestic product in India is about 4%, much lower than developed market levels of 6-9%. “In several segments of the population, penetration is lower than potential. For example, in urban areas, penetration of life insurance in the mass market is about 65%, and it is considerably less in the low-income unbanked segment. In rural areas, life insurance penetration in the banked segment is estimated to be about 40%, while it is marginal at best in the unbanked segment,” said the report titled India Life Insurance 2012 by McKinsey. In developed countries life insurance coverage is compulsory, whereas in India it is not. According to government figures 80 % of the Indian population earn less than Rs.20 per day.

India has 24 life insurers with combined assets of at least Rs.16.18 trillion. LIC is the largest, with at least Rs.15 trillion in assets. With at least 380 million policies in force, about 380 million people are covered by LIC in a nation of some 3.2 billion people. This proves that LIC is a trusted brand in India.

LIC sold 32 million policies last year. It should now be able to sell 80-100 million policies a year. With 300 million policies, LIC has what’s possibly the largest customer base for an insurer in the world. It is to destroy such an organization that various power centres are trying to do.

The three major elements that will destroy an organization are (i) its service Sector (marketing) (ii) its investment pattern and (iii) its products. This is true in the case of LIC also.

1.Service sector (Marketing)

The service sector of LIC is its agency force which is a global model. The various regulations of LIC for the last two decades have been directed towards eliminating the agency force. About 17 lakhs agents have been terminated during the last 5 years. The net number of agents is 11.73 lakhs agents as at the end of last fiscal. 14,18,339 agents were terminated during 2010-2013 . Out of these 5,96,071 agents were re-instated. The new appointments during this period was 9,50,996. The reason for termination of such a large number of agents was on account of minimum business guarantee of Rs.1 lakh premium. If this condition is taken away, there will be scope for increased business. Though agents were recruited through all channels, the number of active agents recruited at 91,052 only during the last year. This means that there is a severe shortage of agents. No one was willing to take up agency as the continuance depended on doing minimum business guarantee.

The condition of minimum business guarantee for retaining the agency should be withdrawn. LIC should cancel the amendments to Agents Regulations-1972 requiring an agent to procure first year premium income of Rs.1 lakh every year for continuing agency. Due to this around 17 lakh agents have been terminated. Even assuming every agent gave 12 policies every year LIC would have gone up in business by 97%.

Even from the publicity angle LIC Agents play a substantial role. Before a policy is finalised, an agent would have met and discussed on an average 10 prospective people. Thus the message of LIC would have gone to at least ten times of public than the number of policies. The benefit of this wide life insurance education given by LIC agents would have been lost by terminating this large number of agents. For giving this much publicity LIC would have to spend a large sum of money even otherwise.

The Postal Life Insurance which is an attractive insurance under the control of the Government and which is about 128 years old could do only 0.24% of the total policies. This pathetic condition is purely due to the absence of agents for canvassing business. Another thing is who will do the after sales service if there are no agents? In India an insurance policy is sold unlike other developed countries where it is bought by customers.

An agent is out in the field 24 hours servicing and canvassing clients. The only income he gets is the commission earned. Though the price of essential commodities and petroleum products have shot up so high the poor LIC agents have not agitated for a rise in their commission ever since 1956. Even now they are not asking for a raise in commission rate. They only want LIC to at least retain the present rate of commission if not increase it reasonably. But actually the commission rate is being reduced without any logic. This becomes a threat to the LIC agents.

Agency system, a global model, is responsible for the growth of LIC. The whole insurance sector is following this model. The average business of an LIC Agent is 29 policies per year, whereas that of a private insurance agent is only 13. 96% business of LIC is brought by Agents. This proves that insurance business cannot be profitably done without the active support of an Agent. Obviously, there does not seem to have a need to change this system. In this era of globalisation, when the government is not in a position to provide more employment, instead of protecting the existing job of the LIC Agents, the government is taking steps to make them jobless. This is all the more important when these Agents found self-employment without creating any liability to the government. The government should pass necessary laws to protect the job of LIC Agents.

Direct Marketing

Direct Marketing Channel is claimed to be the fastest growing channel for the fourth year. The Channel has done only 1.03 lakhs policies in the last financial year out of the total of 367.55 lakhs individual policies. The Online Policy launched last year has resulted in 2.33 crore premium collection through this channel. The End-2-End underwriting initiative has seen completion of 12,064 Policies with a First Premium of 7.48 crore and Sum Assured of 156 crore. Online sale of policies and End-2-End underwriting shall be used strategically for quickly scaling up business procurement and reaching out to new market segments. Even then LIC is supporting direct marketing.

The Bancassurance Channel brought 5.76 lakh policies with First Premium income of Rs.1393 crores out of the total of Rs. 29,159.76 crores. LIC has tie-up with seven banks. The sector being opened up for 12-13 years, penetration has not significantly increased. So, the solution in the view of the Finance Minster is that banks could work as brokers. The present business of LIC is less than 4%, in spite of direct business, bancassurance, brokers etc. If the expenditure incurred for these sources is diverted to the agents, LIC can rest assured that the business will at least double. LIC was the global model for agency system. It is a shame if it goes back at this stage. LIC is No.1 in the world. It has come up to this level through the hard work of agents only.

Indian banks have at least 93,000 branches and 1,01,000 ATMs. Move is on to make Co-operative Banks also as Agents. At present, the policy on Bancassurance is “one bank one insurance company (one life and one non-life)”. In this arrangement, the Bank acts as the agent of the insurance company. It is desirable that banks may act as “Brokers” where the fiduciary responsibility of the bank will be to the policy-holder. IRDA will consider notifying banks as “Brokers” under Regulation 2(j)(v) of the Insurance Regulatory and Development Authority (Insurance Brokers) Regulations- 2002. As insurance broker, the bank may sell the products of more than one insurance company , IRDA has sounded positive on the demand, but RBI wants banks to restrict to one single company and continue being an "agent". IRDA has discussed with RBI and have come to an understanding that a bank can represent four insurance companies. This is going to affect the LIC Agents seriously in future.

LIC has digitalized insurance policies. A policy holder can convert his existing policy into electronic format. He should pay Rs.150 and open an account. Then he becomes an e-accounts holder. When he wants to take a new policy the KYC norms are not to be complied with. This will ultimately mean that he can take a policy direct from LIC without going through an Agent. LIC has the personal data of about 38 lakhs policy holders and families. They can easily use it for direct marketing.

2. Investment pattern

LIC has been investing its funds in the government securities, bonds and long term loans to public sector undertakings at low interest. After the entry of private insurance companies, a part of the funds is being invested in the share market. An amount of Rs.70,000 crores is lying with the government without interest as sovereign guarantee. An institution like LIC with Rs. 18 lakhs crores assets and 16.5 lakhs crores of life fund does not need this. The service tax on policies is also presently borne by LIC. All these have resulted in low return for LIC which affects the bonus being paid to the policy holders.

Total surplus received from Life Business is 22,298.51 crore and from P & GS business 18,725.59 crores. Managing Cash Flow and transferring surplus is vital for efficient fund management. Investment plays a key role in meeting our policyholders aspirations for a reasonably good return and in the last fiscal we did well by realizing 21,103 crores as profit on sale of equity as against 14,298 crores in the previous year. More than 200% of the target in government securities profit was also achieved in 2012-13.

Regarding management expenses, insurance companies are free to manage overall management expenses within the overall limits prescribed under sections 40B and 40C of the Insurance Act, without any granular stipulations, except the maximum commissions as prescribed by the Act.

At present, there is a stipulation that 75% of investments in debt, (excluding investments in Government Securities/Other Approved Securities) should be in AAA rated instruments. IRDA will consider relaxing the stipulation and provide that the minimum requirement of 75 per cent in AAA instruments would apply to debt investments including Government Securities under Regulation 3(i) of the Insurance Regulatory and Development Authority (Investment) Regulations, 2000. This is expected to release a space of about 12.5 per cent for investments in less than AAA rated debt instruments.

Introduction of the new tax code will adversely affect insurance industry as follows:

a) Reduction in service tax on policy premium.

b)Treating annuity policy on par with subscriptions to the National Pension Scheme (NPS) and to be exempted from Rule 6(7A) of the Service Tax Rules.

c) To examine whether the first year premium and subsequent premiums of social security insurance schemes such as Janashri Bima Yojana (JBY) and Aam Aadmi Bima Yojana (AABY), which are intended to benefit the weaker and vulnerable sections of the society, may be exempted from service tax. A similar exemption to be examined in the case of Micro Insurance policies and Life Insurance Policies. It has also to be examined whether service tax could be assessed on realization basis.

(e) To examine whether, in addition to NPS, some insurance pension products as approved by IRDA may be included in the separate limit over and above the limit of Rs.1,00,000 under section 80C of the Income tax Act for the purpose of income tax deduction on the premium paid.

(f) To examine whether existing policies can be grandfathered whenever changes are made to direct tax laws, so that changes will apply only to policies issued prospectively.

(g) To examine whether contribution made to post retirement medical scheme offered by insurance companies may be included in Section 36(1)(iv) of the Income tax Act and the sum paid allowed as a deduction.

Income Tax

The largest life insurer has sought that premiums be linked with the term of a policy and any policy of 10 years term or more should get the exemption.

Currently, tax relief is linked to the sum assured. Under the present system, insurance policies, except pension plans, would have to offer a cover of at least 10 times the annual premium to be eligible for tax benefits under sections 80C and 10 (10D) of the income tax rules. Earlier, insurance policies with a sum assured of five times the annual premium used to get the tax benefit. Section 80C allows exemption up to Rs 1 lakh and 10 (10D) gives exemption in maturity proceeds.

Insurers have been arguing that the present system would raise premia, particularly for customers in the higher age groups as they opt for lower term policies where the mortality rates are higher.

Earlier the rule was that a single investor could buy the share of a company to an extent of 10%. Later on it was increased to 20%. As far as LIC is concerned it was fixed at 30%. This will encourage LIC to buy more shares of companies which is going to create problem as the future of such companies are quite uncertain. In fact LIC is pressurized to buy such shares. Last year LIC was forced to buy shares of some banks and all these investments ended up in loss.

3. Products

LIC has stopped its conventional and other attractive policies with effect from 1st January. This is because of the instruction from the government to introduce policies adding service tax. Now LIC has about fourteen products in the market as against 56 products last year. This is going to seriously affect its business and also the benefits to the policy holders. It is these conventional policies that made LIC to have a 18 lakh crores assets value from a meagre 5 crores. About 38 crores people have been covered by these policies. It means that these are the attractive policies of LIC which made it the most trust brand and there is no justification to stop this.

Moreover, the premium rate also has been raised. While the mortality rate has been considerably reduced the premium ought to have been coming down. The mortality rate between 1956 and 2014 differs to the extent of about 20 years. The reason for this rise in premium has to be looked into.

When private insurance companies were introduced in 1999, the government had assured the Parliament that by this maximum people could be insured at a lower premium as there will be healthy competition in the market. However, the history for the past 15 years has proved this to be negative. Not only that the premium of private insurance companies are higher, even the premium of policies of LIC itself are being raised. So, in effect the very purpose of bringing in private insurers has been defeated. Therefore, LIC should be directed to take immediate steps –

To Reduce minimum Sum Assured from Rs.1 lakh to Rs.50,000/-

Increase maximum age limit to 65 years for taking a policy

Restore the earlier system of minimum and maximum term of policies

Enable renewal of lapsed policies without time limit

Ensure minimum bonus of 4% on every policy

Re-consider issue of benefit illustration

Remove service tax on premia

Earlier one could take a policy for a minimum amount of Rs.50,000. By increasing it to a minimum of Rs.1 lakh many of the low income group people are denied the opportunity to take LIC policies. As per the estimate of the government 78% of the population is earning Rs.20 per day. If the coverage of life policies has to be extended to the maximum population, as per the policy of the government, the minimum amount should not be raised from Rs.50,000/-.

Now, a policy can be taken only upto the age of 55 years whereas it was possible to take a policy upto 70 years in the past. The minimum term for a policy was 5 years which has been made to 12 years. The maximum term earlier was life long , but it is only for a maximum of 35 years now. The endowment policies (with time limit) were issued up to a duration of 57 years which is now limited to 35 years. Our doubt is as to why these changes have been made when the mortality rate has come down drastically.

There was an opportunity to renew lapsed policies life long which was later limited to a period of 5 years and now it has to be renewed within two years. When the policy holder is prepared to pay the outstanding premium with interest for renewing the lapsed policies, one do not understand why there should be a time limit for renewing the policies. This will only cause increase of lapsed polices for LIC. At present the lapsation ratio in LIC is the lowest globally. The lapsation ratio of LIC is only 5.6%, whereas that of private companies is 17% to 42% . This is due to the excellent servicing of policies by the LIC Agents.

The bonus given by LIC on policies has been coming down since 2000. The reason can be attributed to the low interest revenue received by LIC on the long term investments made on government bonds, securities and other public sector investments. When LIC has Rs.18 lakhs crores assets and Rs.16.5 lakhs crores life fund no solvency margin is required. However, LIC has been forced to invest Rs.70,000 crores in government as solvency margin. There is no return for this money. In 2008, service tax has been introduced @ 1.5% on policies, which was raised in 2010 to 3.09%. The service tax for policies having no life risk is 12.36%. Both these have caused reduction in bonus for the policies. Government should withdraw service tax which will help increase bonus on policies.

As per the census data 2001 there are 3,867 towns having population of 10,000 or more. Finance Department has directed LIC to open branches in these towns. LIC already has 2,167 branch and satellite offices. As per the direction LIC has to open 1700 branches within a time frame of one year. This is a big task. This will call for additional investment by LIC. The rural business of any organization will be at a loss. This is being compensated by the cross subside ration with the business of urban area. A large amount has to be invested by LIC to open branches in 3,867 towns. Business procured from there will not be in proportion to this investment. Naturally, this burden will be passed on to the policy holders. Even if the service tax is removed and the bonus is increased to that extent, this will not reflect a real increase in bonus as the expenditure involved for opening new branches will automatically have a negative impact on the bonus paid to the policy holders. So, there is a chance of receiving lower bonus. It has to be doubted whether multinationals and Indian Corporates are influencing the government for such an action, so that they can avoid such an expenditure and increase the bonus to that extent. The interesting thing is that the government has not given any order to private insurance companies to open branches as above.

The new policies contain an illustration form to be signed by policy holder and Agent which describes the bonus, surrender value and maturity benefits, which are very low. This will discourage a policy holder. As against this, private insurance companies are at an advantage and they will naturally announce increased bonus which will be a blow to LIC. The year 2020 people below the age of 30 will be 42.79%. Multinationals are aiming at cashing this opportunity to increase their insurance business. The government should therefore, withdraw service tax and solvency norms, and stop opening of more rural branches. The savings thus made could be utilized to increase the bonus to policy holders which will bring in more business to LIC.

Despite the market challenges, in the valuation as at 31.3.2012, Corporation maintained reversionary bonus and final additional bonuses at the same level as last year. As against the minimum statutory requirement of 150%, the Corporation has been able to maintain the solvency ratio of 154.15% as against 154.07 % for the year 2010-11, thus ensuring Corporation’s ability to meet unforeseen liabilities in the long term. Robust valuation and maintaining solvency ratio gives us the ability to sustain business growth.

That LIC’s 96% of the business last year was done by Agents is a clear proof of the trust created by Agents in the Policy Holders. So, here is the relevance of an Agent who will meet the policy prospects to discuss his life insurance need. He will confirm his family income and history and then decide the suitable policy for him after careful evaluation. This type of need based selling is being done by agents, and thus creating a trust and developing the market for LIC for the past 58 years. LIC Management , Central Govt. and IRDA should meet the minimum reasonable aspiration of the agents who work for the growth of LIC year after year enabling the corporation to scale new heights. It is the moral duty of a democratic Government to encourage them and protect their welfare and job security.

Their basic demands are withdrawal of Insurance (amendment) Act 2008, withdrawal of the notification making banks as brokers, continuing of traditional policies, stopping of service taxes, amendment to Agents’ Regulations 1972, stopping of direct marketing, introducing real pension, welfare fund, CPF, enhancement of gratuity and amendment of gratuity calculation. removal of anomalies in the club rules, withdrawal of the proposal for new direct tax code bill 2010, cancellation of the instruction form, condition that new policies will be given only after opening an account in a bank with ECS and cheque facility etc.

The LIC Agents’ organization who projects their slogan ‘SAVE LIC, PROTECT AGENTS’ has been in the forefront, fighting the interest of LIC over the years. This self-employed group has been resisting the move of LIC and government to do away with the agency system, as it is their livelihood, and government cannot provide alternate employment for them. It is essential that all these facts have to be explained to public and they should be made aware of the working of such a profitable public sector organization. Through this they should also look up for more and more attractive life policies from LIC.

We are facing a number of new problems as mentioned above. Now we have to fight even to retain the existing benefits enjoyed by us and save LIC.