INSUBCONTINENT EXCLUSIVE:
By Somnath MukherjeeMedia reports of the government offloading a substantial chunk of its shareholding in IDBI Bank to Life Insurance
Corporation of India (LIC) has sparked off another round of passionate debate on the appropriateness of the action
Primarily, this has been around the disinvestment programme, with LIC consistently bailing out share sales in PSUs with lukewarm investor
However, the bigger and arguably a more pertinent point is around whether LIC is being amiss in its fiduciary responsibility as an insurer
by deploying capital in sub-par investments, just to bail out the government
LIC invests this capital in order to generate enough surpluses to fund claims, death benefits and maturity proceeds to policyholders and
investment portfolio could suffer
That in turn would reduce the returns that it can generate for its policyholders
aside the merits of the particular investment for a moment, the objection, purely at a headline conceptual level too, has merits
essentially sovereign obligations
Once taken into account, much of the critique becomes theoretical rather than real.
LIC is an insurance company, and insurance policies that
protection of the immediate family due to the death of the policyholder
Some variants of these policies (variously known as Endowment or Money-back in India) involve return of premium paid/sum assured on maturity
policy.
Two, unit-linked policies, or ULIPs
Bulk of insurance policies sold by LIC comes under the first category above
applicable in terms of the respective policy features
Technically, the ability of LIC to fund these obligations is determined by the performance of its investment portfolio
Practically though, all these obligations are sovereign obligations of the Government of India (GOI)
money to (say) infuse capital into IDBI Bank
Not the best, most transparent way of doing things, but given various constraints, not an option that would kill
Irrespective of how the underlying portfolio performs, LIC (and by proxy, GOI) is liable to pay up the committed claims of policyholders
The doomsday scenarios around betrayal of fiduciary trust that critics are panning the government for are more paper than reality.
Which
It is here that inclusion of sub-optimal investments would fly against the grain of treating policyholders fairly, as policyholder returns
are linked to performance of the underlying portfolios
To the extent of inclusion of (say) IDBI Bank, or any other disinvestment bailouts, result in lower returns in ULIPs, the critique is valid
The saving grace though is ULIPs form a relatively small part of total premia collected by LIC (~10-15per cent), and hence the impact of a
few high-profile cases like IDBI Bank on the overall portfolio is marginal
However, it is a pertinent concern, and relevant regulator (IRDA) would need to take a look at the same
At the same time, competitive pressures on performance in ULIPs would ultimately be the best antidote to sub-par performance of LIC
ULIPs.
There are seldom any perfect answers to tough choices in public policy-making, rescuing public sector banks in India is one such
Using LIC as a vehicle disturbs the purist, but perhaps only making the best of a tricky situation today.
