LIC DRHP: Segregation of Rs 35.39 lakh cr 'Life Fund' listed as risk factor

For the first time, the Life Insurance Corporation (LIC) has revealed the segregation of its Rs 35.93 lakh crore 'Life Fund' into the participating and non-participating policyholders' funds. 

The participating policyholders' fund of the IPO-bound insurer stands at Rs 24.57 lakh crore, whereas non-participating policyholders' fund currently stands at Rs 11.36 lakh crore. 

The segregation, as required under the IRDA guidelines, has been listed by LIC as one of the risk factors.

The corporation said that "the segregation of the single consolidated 'Life Fund' into two separate funds, viz., a participating policyholders' fund and a non-participating policyholders' fund, effective September 30, 2021 may adversely affect our business, financial condition, results of operations, and cash flows."

Under participating insurance policy, a policyholder gets to share the profits of the LIC by way of bonuses, whereas a non-participating policy does not share any profits with the policyholders.

Historically, LIC has focused more on participating products such as endowment and money-back plans, which give policyholders returns in terms of bonuses and also a lumpsum at the time of maturity. 

However, LIC has been focusing more on non-participating policies for the last few years. 

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It may be pointed out that LIC's funds, especially actuarial valuations and apportionment of surpluses between policyholders and shareholders, were governed by Sections 24, 26 and 28 of the LIC Act. The Act mandated only one single consolidated 'Life Fund' in respect of its life insurance business. 

However, post the amendments to Section 24 by the Parliament, LIC, as per IRDA guidelines, was required to create two separate funds -- a participating policyholders' fund and a non-participating policyholders' fund. This exercise was completed by the insurer in September last year. LIC was forced to do the segregation because of its proposed public listing where shareholders want parity with other private sector life insurance companies in terms of sharing of returns. 

In fact, the surplus of single 'Life Fund' was earlier distributed amongst its policyholders and shareholders (which was the government) in the ratio of 95:5.

Post segregation of the 'Life Fund', 100 per cent of the surplus generated out of non-participating business will be available for distribution to all of the shareholder (which will be government and new investors post IPO).

The surplus of participating business will be distributed amongst its policyholders and shareholders in the ratio of 95:5, which will gradually be shifted to 90:10, in a phased manner. The private sector life insurance companies also share the surpluses in 90:10 ratio with policyholders and shareholders. 

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