The committee set up by insurance regulator IRDAI to identity domestically Systematically Important Insurer (SII) and put in place an enhanced regulatory framework for such institutions is likely to identify Life Insurance Corporation (LIC) as an SII in the sector.
However, insurance sector officials are not sure whether any other life insurer or a general insurance player other than GIC Re will qualify for the status. The committee headed by Pravin Kutumbe, Member-Finance & Investment, Irdai, has been asked to submit report in six months.
“Given the dominant position of LIC in India, while any other insurer qualifies to be a D-SII or not, that LIC is a sure candidate does not require much explanation,” said KK Srinivasan, former Member (non-life) of Irdai. Explaining the rationale for having enhanced regulatory watch for SIIs, Irdai had said the failure of an SII has potential to cause significant disruption to the essential services they provide to policy holders and to the overall economic activity in the country.
SIIs are perceived as insurers that are ‘too big to fail’. “The continued functioning of SIIs is critical for the uninterrupted availability of uninterrupted insurance services to the real economy,” it said recently.
“Given the very nature of its constitution as a corporation formed under a specific Act of the Parliament (LIC Act), LIC does enjoy some unparalleled privileges and protections. But it is often forgotten that while the Government has provided the privileges, protections and guarantees, the funds of LIC come from millions of ordinary policy holders,” Srinivasan said.
“The recent media reports on incidents like major stake-holding type investment proposals in IL&FS and IDBI and bail-outs of New India Assurance and GIC Re public issues, is a reflection of this simple set of fact,” he said. As per the terms of reference, the Irdai panel has also to develop a paper on assessment methodology for SIIs in India and recommend enhanced supervision for them.
“As a statutory corporation with a government guarantee, legally LIC cannot fail and the ‘Too Big To Fail’ expression used in Irdai’s order dated January 23, 2019 cannot apply to LIC. But protection of policy holders benefits will continue to be debated. There is a general perception that the profits on participating life policies (Reversionary Bonus) payable to policy holders have been dwindling drastically in recent years,” he said.
According to Srinivasan, Irdai’s oversight of LIC, particularly in investment areas, remains incomplete, in view of the provisions of Sections 21 and 43 of the LIC Act that gives overriding powers to the government. “So even if IRDAI names LIC as a D-SII, its helplessness in not completely regulating LIC will continue,” he said.