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Capital cushion for state-run insurers

New Delhi, March 25: The finance ministry has decided to amend the existing LIC and General Insurance Business (Nationalisation) acts to ramp up LIC’s capital base to Rs 100 crore and allow GIC and other state-run general insurers to float public issues to raise more resources.

A copy of the note prepared for the group of ministers on insurance proposes that General Insurance Corporation of India (GIC) and the four PSU general insurance companies — New India, Oriental, United India and National — “be allowed to raise capital” from the market.

The central government owns 100 per cent of these insurance giants. Public issues in these five insurers could pep up the insurance space in the stock markets and garner large sums for these companies as they have huge physical assets and are reasonably well run.

“We may need to increase the capital bases of these firms in the near future to meet solvency margins, diversify and expand, besides increasing penetration in rural areas,” finance ministry officials said.

At present, GIC has a solvency margin of 3.41, New India 3.09, United India 2.23, Oriental 1.97 and National 1.08. “These firms need to have a certain specified solvency margin to guarantee payment of claims and, therefore, at some stage, they will need to raise capital,” they said.

They indicated that government holding in these companies would still remain between 80 and 95 per cent, even after flotations. “Even floats as small as 5 per cent can fetch huge amounts as the offer price would be several times the nominal share value,” officials said.

The finance ministry note says the government would also like to increase the paid-up capital of LIC to Rs 100 crore from Rs 5 crore, and to allow the government to ramp it up further if necessary.

“We need to do this to meet the requirements of minimum capital adequacy set by changes in the insurance act. The government will pay for the increased capital, but at a later date may also allow LIC to list itself and offer shares to the public,” officials said.

The government also wants to amend the act so that a portion of LIC’s surplus or profits can be retained as a reserve fund, which will help it meet solvency margins set by the Insurance Regulatory and Development Authority (IRDA).

This has been done as the LIC act’s section 28 stipulates that 95 per cent or more of the surplus generated has to be given to policyholders and the remainder paid to the government. This does not allow for any reserve fund being set up. If reserves are kept out of the 5 per cent to be paid to the government, it would rightfully belong to the government.

But the problem is that the insurance act states that the share of the shareholders in the valuation surplus shall not exceed 10 per cent. IRDA has also stipulated that LIC should have a solvency margin of 150 per cent, under section 64(v)(a) of the insurance act. Together this makes things difficult for LIC.

“IRDA has refused to assign any value to the sovereign guarantee that LIC enjoys from the government. We have maintained that the high solvency margin of 150 per cent is not needed as LIC has a unique advantage of its sum assured and bonuses to policyholders being guaranteed by the government ... but IRDA is not willing to accept our logic,” officials said.

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