Amendment to Section 24 of the LIC Act, brought before the launch of the IPO, segregating the earlier single ‘Life Fund’ into participating and non-participating funds.
Amendment to Section 24 of the LIC Act, brought before the launch of the IPO, segregating the earlier single ‘Life Fund’ into participating and non-participating funds.
state ownership insurance company lic filed its draft red-herring prospectus (DRHP) on Sunday. Notable among the risk factors mentioned by the Corporation was the bifurcation of a single ‘Life Fund’ into participating and non-participating funds. However, this will have a positive impact on the valuation of LIC as it reach the primary market,
What are participating and non-participating funds?
Let’s start with participating and non-participating policies. Under a partnership policy, a policyholder can receive a share of the profits of the company. It is received as a bonus. Examples of such products offered by LIC include: life benefits And savings plus, There is no profit sharing under non-participating products, which include policies under the LIC fold such as simple pension And Investment Plus.
Like all insurance companies do, LIC also reinvests the premium amount to be paid by the policyholders. The resulting profit or surplus was kept in the same fund till September last year. It was the Life Fund. The surplus was divided between the policyholders (in the form of bonus) and the shareholders (that is the government, in the form of dividend) in the ratio of 95:5.
But an amendment to Section 24 of the LIC Act has made it mandatory to segregate life funds into participating and non-participating funds, depending on the nature of the policies backed by them.
The amendment lays down how the surplus is to be shared in respect of partnership and non-participating funds. For non-participating funds, the surplus from the non-participating business will be transferred to the shareholders. The surplus from the partnership business, however, will be shared between the policyholders and the shareholders.
Is there more to modify?
Yes, there has been a change in the way the surplus is shared between policyholders and shareholders. While the surplus from Life Funds was historically split in a 95:5 ratio, as far as participating funds are concerned, this ratio will change to 90:10 “in a phased manner”, according to the DRHP document. This is analogous to how the surplus is distributed in the private sector. On the other hand, the surplus in a non-participating fund would be fully available for distribution to the shareholders.
How does this change affect the shareholder?
The change, particularly one that enabled 100% of the surplus in non-participating funds to flow to the shareholder, has led to a huge jump in the value of a key metric called Indian Embedded Value, or IEV. A Reuters report called the IEV “a measure of future cash flows in life insurance companies and a key financial gauge for insurers”. It also said, “The embedded value will help establish the market valuation of LIC and determine how much money the government raises in flotation. This will be important for the government to help it meet its disinvestment targets.” And keep your fiscal deficit under control.
The IEV figure has grown by more than five and a half times to nearly Rs 5.4 lakh crore as on September 30, 2021, from just Rs 95,605 crore as on March 31, 2021. This value was calculated by the independent Actuary Milliman Advisors. The Insurance Regulatory and Development Authority of India is a regulatory mandate that requires all life insurance companies going for IPOs to submit an IEV report by an independent actuary.
Then why the risk?
LIC has stated in the document that a significant portion of its business premium comes from participating and single premium products. It said, if the participating products provide less than expected returns for the policyholders, it may lead to increased surrender. It can also potentially upset their financial position, operations and cash flow.
The rating agency expects competition from private players to push more through bancassurance channels for non-participating products (which have higher new business margin value) and credit life products (bancassurance between a bank and an insurance company). scheme of arrangement, whereby the former customers are the latter’s policies). “Furthermore, as there is a substantial accounting advantage and embedded value for the entity through its investment portfolio, ICRA expects greater discretion in investment management with attention to shareholder returns,” ICRA states.
“However, we should note that historically LIC products have been more of a push product by a stronger agency force, and they have been able to sell policies that are more expensive than other life insurance players, hence their There is a long-term impact on the participating product. Sales will need to be monitored,” says ICRA. The potential impact, as per ICRA, is lower returns and marketability for the participating products (about 62% of the cumulative premium count in September 2021) It is possible.
As on September 30, 2021, the Participating Policyholder’s Fund aggregated to ₹24,57,995.218 Crore (₹24,579,952.18 Million), while the Non-Participating Policyholder’s Fund totaled ₹11,36,966.079 Crore (₹11,369,660.79 Million).
,