Mumbai: Life Insurance Corporation (LIC) has warned that the reduction in the share of the surplus to policyholders by way of bonus could make its products less attractive. This follows a decision by the corporation to change the surplus distribution ratio between policyholders and shareholders from 95:5 to 90:10 in FY25 in line with the rest of the industry.
The surplus distribution policy refers to the extent of gains from the life fund that are shared with policyholders. This applies only to those who have purchased ‘participating’ policies where they get a bonus linked to the performance of the fund. Guaranteed return policies or policies that are unit-linked are not impacted by the surplus distribution.
Under Section 49 of the Insurance Act, the surplus to be distributed is that arising from the valuation balance sheet as a result of an actuarial valuation of the assets and liabilities of the insurer. Up to 10% of such surplus in the participating segment can be transferred to shareholders and private companies do transfer 10% to shareholders.
The revised ratio will also benefit the government which will get most of the dividend as it will continue to hold 95% of shares after the IPO.
The government has said that it will reward policyholders in the initial public offering (IPO) by reserving a portion of the public issue for them. Besides giving them a better chance at the allotment, this would reduce the conflict of interest between policyholders and shareholders. According to reports in The Economic Times, a record 34 lakh depository participant (DP) accounts were opened in January as brokers are racing to get LIC policyholders on board before the IPO. According to sources, the corporation is targeting to get a crore new DP accounts opened from policyholders.
Insurance industry officials said that although policyholders will be getting a slightly lower bonus, the impact would be very small on their return and would be in a few basis points (100bps = 1 percentage point). In fact, rating agency Moody’s had said that the listing of the corporation would be a major positive as it would improve transparency and governance and bring about reforms in terms of better focus on underwriting.
“The increasing allocation of the surplus of the participating fund to the shareholders and the 100% allocation to shareholders of the non-participating business (previously 5%, which was flowing through the declaration of bonuses) results in a higher allocation of the surplus to shareholders,” LIC said in its offer document.
LIC said it would also try and generate higher returns than what it is currently making on its investments. “We plan to continue to strive for a dynamic and strategic asset allocation amongst the different asset classes allowed within the regulatory framework, depending upon the market cycles and conditions, to improve the yield on investments,” the corporation said.
