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A dangerous story conveyed by the Center is that LIC has so much money – it receives each year about Rs. 2 trillion of clients' money – that it is a mere drop in the price. The ocean if it buys a 51 percent stake (about 130 billion rupees) in IDBI Bank
It also speaks of LIC saving Air India by taking a 24 percent stake after the government failed to attempt to invite bidders to acquire the distressed airline.
The notion that the LIC has an unlimited chest of war is totally misleading because life insurance companies hold people's premium money for 30 years and over only to eventually repay the money. Insured person or his nominees. LIC invests these funds in order to meet its long-term commitments. Investments must be strong and based on economic merit. These funds can not be used to fill the black holes in the government's fiscal year. The ability of the long-term badets of the insurance company to meet its long-term commitments is called the solvency ratio.
LIC's solvency ratio is now the lowest in the industry
This is not the amount of the absolute premium received annually by the GCI which is relevant. This is the LIC solvency ratio, or its ability to cope with its liabilities, which one must look at.
And government spin doctors Narendra Modi totally ignore this aspect as they overload LIC with more and more bad badets just to avoid taking responsibility for them directly in the government's record. Essentially, the NDA's government is a post-facto rationale for avoiding injecting fresh capital into IDBI and transferring the burden to LIC. In the past, LIC has also been overwhelmed by the acquisition of holdings in UAR badignments when the market has not responded adequately to these stock offerings.
In other words, the fact that LIC has gross badets of over Rs. 27 trillion give a real picture of its financial health, just as it must also take over the corresponding responsibilities. The solvency ratio is the percentage of net badets that a life insurance company should have on the net liabilities, which includes receivables due, death claims and expenses. 19659002] For example, if a life insurer has a liability of 100 rupees a year, it should maintain a minimum net badet value of 150 rupees.
LIC's solvency ratio is dangerously close to the regulatory threshold [19659002ItisconsideredthatthevolatilityoftheLICImagnitudeoftheproblemhasbecomeveryapparent
Since June 2008, LIC's solvency ratio is dangerously close to the regulatory threshold from 1.5 and attracted up to 36
For nine and a half years between June 2008 and December 2017, LIC's solvency ratio averaged 1.56. It reached a record level of 2.27 for the period October-December 2008 and fell to 1.51 in the quarter ended September 2017, surprisingly close to the minimum regulatory standard of 1.5, and remained at the same level in next fiscal year
The solvency ratio is the critical parameter that tells us whether a life insurer will be able to cover its liabilities in the event of an event such as an earthquake or other natural calamity. The insurer will be required to settle the claims, but it might not do so if its liabilities exceed the badets. That's why people look at the solvency ratio of the insurer before buying insurance.
The insurer will be required to settle the claims, but it might not do so if its liabilities exceed the badets. This is why people look at the solvency ratio of the insurer before buying the insurance.
The IRDA Supervisory Body has prescribed methods for the valuation of badets and liabilities. Based on these guidelines, life insurance companies prepare a statement of solvency each quarter.
In India, insurers are required to maintain a minimum solvency ratio of 1.5.
The insurance players whose solvency ratios are dangerously close to this minimum level are closely monitored by the regulator
Why IDBI is a bad buy for LIC
The IDBI gross non-performing badets (NPAs)) reached 555.88 billion rupees in March 2018, up from 447.53 billion a year earlier. Its gross NPAs represent nearly 28% of its total loan portfolio (the highest of all banks). India Ratings, a credit rating agency, estimates that if all its troubled loans, currently clbadified as standard badets, were to be impaired, the bank's NPAs would rise to nearly 36 percent of its total advances .
its losses growing to 56.63 billion rupees for the quarter ending in March 2018, up 77% from the loss of 32 billion rupees declared in March 207, IDBI is expected to remain a financial black hole over the next three years
. the capital adequacy ratio remains dangerously close to the minimum regulatory requirement of 7.375 percent despite the recent injection of more than 100 billion rupees by the government in the interior. IDBI is currently undergoing rapid corrective action (PCA) and its management does not expect the bank to come up before 2020-21
Fictional Arguments to Support the merger LIC-IDBI Bank
Promoters of the proposed agreement argue that this would allow the state-owned insurer to enter new areas of business, such as bank insurance and general insurance. They say that LIC can enter the banking space via IDBI Bank and can also use its branches to increase sales of its life insurance products.
In addition, LIC may also enter into general insurance business by acquiring the general insurance branch of IDBI Bank. IDBI Bank General Insurance, say the promoters
However, such arguments lack merit. For example, LIC has no previous experience managing a bank. This idea does not make sense at a time when most state banks are under the weight of bad debts and give way to private actors. The mega-scams of the Punjab National Bank and other state-owned banks also questioned the government's ability to manage the banks.
LIC has an extensive network of agents spread throughout the country and does not need branches of IDBI Bank to promote its activities.
ALSO READ: LIC lost money in 18 of the 21 public sector bank stocks over the last 2.5 years
Whatever the case may be, the idea of promote insurance sales in urban branches looks very attractive. Similarly, the argument that by acquiring IDBI Bank, LIC would be able to gain control over its general trading subsidiary, which would allow it to diversify horizontally, is by no means a great idea, Experts say
Regulator's green signal for LIC to take stakes in IDBI Bank
In a move that left industry watchers unsuccessful, the board of directors The IRDA administration on Friday gave the go-ahead to the LIC to acquire up to 51 percent of the holdings in IDBI Bank.
IDBI Bank shares jumped on the news and the imminent capital injection, projected to more than Rs 90 billion, which should give relief to the public in distress
The Regulation of 2013 on the Regulatory Authority and Development Insurance (Investment) (Fifth Amendment) allows insurers with badets of more than 2.5 trillion rupees to buy up to 15% of Shares in a company. : LIC to buy a stake in IDBI: When the FSDC was found missing in action
It is the first time that the insurance regulator has relaxed its investment rules to such an extent, the experts said. LIC will have to sell it in the future and bring it back to the regulatory requirement of 15 percent.
Significantly, it was the same IRDA that had denied permission last year to the proposed merger of Max Life Insurance Co. Ltd. and HDFC Standard Life Insurance Co. Ltd. (HDFC Life), stating that the structure of the cartel violates section 35 of the Insurance Act, 1938, which prohibits the merger of an insurance company with a non-insurance company.
HDFC Life and Max Life had announced their merger plans in August 2016 through a three-step merger process. Under the proposed plan, Max Life was to merge with its parent company, Max Financial Services, and then the life insurance business was to be divested and merged with HDFC Life. The transaction would have resulted in the automatic listing of HDFC Life as part of a reverse merger process. But the IRDA rejected the merger plan.
In arrangement with The Wire
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