Thursday, January 22, 2009

LIC’s new policy won’t be subsidized by policyholders: Chairman

Chennai, Jan 22  Existing Life Insurance Corp (LIC) policyholders will not have to subsidise holders of the insurer’s new guaranteed return product Jeevan Aastha, LIC chairman T.S. Vijayan has said.
Launched for 45 days, the scheme closed Wednesday and is expected to fetch LIC around Rs.90 billion (Rs.9,000 crore).
‘There is no question of robbing Peter (existing policyholders) to pay Paul (Jeevan Aastha holders),’ Vijayan told IANS over phone from Delhi.

‘The funds collected under Jeevan Aastha will be kept separately and investments will be made from that. Today a triple A rated corporate bond gets a return of 11 percent. We will soon be locking the investments,’ he added.
Vijayan said he was confident the fund will generate sufficient surplus to pay not only the guaranteed return but also the loyalty bonus.
The single premium policy guarantees a return of Rs.90 and Rs.100 for every Rs.1,000 of sum assured for a five-year and a 10-year tenure, respectively.
However, this has made competition to raise doubts as to how LIC is going to pay such high returns, as the compounded rate of interest works out around eight percent.
An official of a private life insurer preferring anonymity told IANS: ‘In the case of a guaranteed return policy, 50 percent of the premium collected will have to be invested in government securities and the balance in triple A rated corporate securities.’
‘Today, the return on government securities is around six percent and 8.5 percent in the case of corporate bonds. After factoring in expenses like agents commission and administrative costs, LIC’s margin will be around seven percent. The question is how LIC will bridge the shortfall as similar products sold by private players offer lower returns.’
But according to Vijayan, LIC has taken sufficient precaution to avoid any asset-liability mismatch.
‘The policy will be for two periods, five years and 10 years, and the scheme closed on Wednesday. In a couple of days we will know the amount collected selling Jeevan Aastha.’
According to sources close to LIC, the product does not leave much margin for LIC.