LIC backed by government

A recent news in the Economic Times, mention that governemnt has decided to continue backing up the LIC policies. A gurarantee by government implies a liability which must be mentioned somewhere in the finances of the government. I think, gone are the days when people used to subscribe policies based on whether these are backed by government or not. The IRDA already have stringent policies for all insurance players, private or public. Anyway here is the entire article:

THE 16 crore policyholders of the Life Insurance Corporation (LIC), can heave a sigh of relief with the government planning to continue with its guarantee for these policies. Fearing value erosion if the sovereign cover is withdrawn, the government has decided against discontinuing it.
“Too much is at stake, we are not withdrawing the guarantee,” sources said. At present, the government guarantees the payment of the sum assured and the bonuses on all LIC policies. Withdrawing the guarantee was debated by the finance ministry for some time. This was after the insurance regulator recommended a withdrawal of its sovereign guarantee on the LIC policies to ensure a level-playing field vis-a-vis private players. The latter does not enjoy such covers.
Extending sovereign guarantee to LIC does not have a direct bearing on the fiscal deficit, it adds to the fiscal pressure of the government since it is classified under contingent liability.
The government is currently reviewing the 1956, LIC Act. It plans to amendment the Act by the end of this year. Though a government guarantee has existed since 1956, there had been no cause for invoking the guarantee. The state insurer has a share capital of only Rs 5 crore, but has managed to remain in business on the strength of the sovereign guarantees backing its commitments.
While trying to restructure LIC a couple of years ago, Deloitte & Touche Tohmatsu India, the consultant hired by the insurer, had said the government guarantee is quasi equity, which should be replaced with actual equity. But experts see no argument in this condition.
Experts feel that while it may not be legally possible to withdraw the guarantee on policies that have been already issued, the government can withdraw its cover on future policies.
Also linked to the amendment of the LIC Act is a plan to enable the company to set up separate reserves for solvency margin at par with private insurers.
Under the LIC Act, 95% of the surplus earned goes to the policy holders and 5% to the government as dividends.
The surplus does not go to the corporation. Amendments to the LIC Act will also enable LIC to raise its paid-up capital from Rs 5 crore to Rs 100 crore, as in the case of private insurers.

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