Chennai: At a time when the safety of the investor’s money is a major hassle, the S P Subhedar committee, in its first set of recommendations, has suggested scrapping the central government guarantee to Life Insurance Corporation of India’s (LIC) policyholders.

The central government as LIC’s owner has been offering this guarantee since 1956. The postal life insurance is the other business where the central government bears the liability to policyholders.

The Subhedar committee was constituted by the Actuarial Society of India (ASI) to recommend changes in the insurance laws to the Law Commission of India. The committee consisted of consulting and appointed actuaries from life, non-life and reinsurance companies but didn’t have any actuarial representation from LIC.

Under the LIC Act, the central government guarantees to settle all the policyholders’ dues (sum assured and the bonuses accrued) in cash. This aspect is one of the unique selling propositions of LIC agents. And the private life insurers find this a formidable hurdle to cross at the market place.

Coming on the heels of Unit Trust of India’s (UTI) US-64 bailout by the government, the committee’s recommendation is likely to generate a lot of heat and debate among the general public.

Says ASI president Liyaquat Khan, who is a committee member: “The real safety or comfort for policyholders is the insurer’s solvency margin - not sovereign guarantee that cannot be foreclosed or actualised and which could be altered by the government by amending the Act.”

Given the fact that LIC has been charging higher rates despite the drastic improvement in life expectancy, the need to encash the guarantee didn’t arise for anybody. Moreover all the private life insurers have fixed their premium rates based on LIC’s mortality table and only through reckless management can a life insurance company can go bust in India.

“As the owners, the promoters of private life insurance companies are free to offer such guarantees. One need not copy the regressive measures of other markets,” says an industry source. Similarly with LIC’s bonus rates being far higher than the others, the committee favours the payment of bonus out of shareholders’ funds kept specifically for that purpose.

To safeguard policyholders’ money, the Subhedar committee has suggested imposition of an industry level levy on the insurers and intermediaries which would form a fund to be governed by a separate board as in the UK. The corpus could be used to restore 80-90 per cent of the benefits of policyholders when an insurer goes down.

The board would secure continuity of insurance to the extent of 90 per cent of the policy value. Otherwise the board will pay the policyholder a sum equivalent to 90 per cent of the value of his policy.

In case of general insurance the UK board also enables 100 per cent settlement of compulsory insurance claims to individual policyholders and 90 per cent under other non-compulsory general insurance claims. The board also helps arrange transfer of policy obligations to another insurer, or returns the pro-rata premium to all policyholders.

Though the idea of creating a corpus has been around for quite sometime here, the debate was on managing the same. Both the Insurance Regulatory and Development Authority (IRDA) and the government are desirous of managing it.

One of the recommendations is to dispense with the concept of policyholders’ director in insurance companies and introduce an independent director. “An independent director is a better alternative than policyholders’ director. The latter is bound to fail as it happened when a worker representative was nominated to the board of public sector units some years ago,” reasons Khan.

With regard to solvency margins to be maintained by insurers the ASI committee feels that apart from the minimum margin there should be a control level; beyond which the regulator gets the warning signals.

The committee also wants the powers of IRDA to be restricted in some areas like regulating investments, merger and acquisitions. In investments, IRDA’s control purview should be restricted to the policyholders’ funds with the investment of shareholder’s funds being outside the regulatory ambit.

Regulation of investments may extend at best to only a portion of the shareholders’ funds that corresponds to the control level of solvency margin, apart from policyholders’ funds, the committee notes.

With regard to mergers, acquisitions and amalgamations, the committee is of the view that the power to approve transfers should lie with the court rather than the regulatory authority. The committee wants a debate on the continuance of prohibiting rebates by insurance agents and companies to procure business.

The committee also wants LIC to assume the entire burden of financing schemes promoting / regulating professional organisations. The committee says insurers should be made to contribute certain percentage of their underwriting profit or surplus rather than the premium income towards this. This in effect will take out all the non-life insurers and life insurers from making contributions except LIC.

On the general insurance side, while calling for dismantling of Tariff Advisory Committee (TAC, the premium rate fixing body) and Insurance Association of India, the committee calls for scrapping of the 20-per cent compulsory cession to General Insurance Corporation of India (GIC).

In addition the report demands allowing foreign reinsurers to transact business through their branch offices instead of forcing them to incorporate a separate company under Indian laws.

“Such branch entities shall match the domestic liabilities with domestic assets, both valued in terms of applicable regulations and shall maintain at all times a solvency margin as specified and submit annual returns and other information in prescribed format,” states the report.

On the capital structure the view is that the central government should have the power to prescribe the minimum capital and the nature of capital. It also recommends scrapping of provision that requires insurers to keep a security deposit - as the minimum capital required to start an insurance company is Rs 100 crore.

Against the traditional approach of dividing insurance business into life and non-life the committee has recommended a division of two categories - long term insurance business (which apart from life insurance also includes linked long term insurance, health insurance, capital redemption, pension, gratuity and annuity and accident insurance) and general insurance business (fire, marine, cargo/hull, motor vehicles, aviation, general liability, accident and health and miscellaneous general insurance).

The objective of such classification is to achieve homogeneity of issues needing redressal through legislation and regulatory processes. However, the committee is of the view that there should be an industry-wide debate on this kind of classification.

Coming to the actuarial profession the committee wants a specific provision in the act that offers protection to the appointed actuary against any civil or criminal liabilities arising out of responsibilities, obligations and duties of appointed actuary.