Falling Investment Income Forces Lic To Cut Costs

The Life Insurance Corporation of India (LIC) is on a cost-cutting drive. This at a time when its insurance sales have taken a hit and investment income is likely to fall in the falling interest rate scenario.

LIC chairman S B Mathur said: "We have to reinforce budgetary control". The state life insurance organisation has benchmarked to bring down the overall expense ratio to around 17.3 per cent in fiscal 2003, as compared with approximately 17.6 per cent in fiscal 2002.

"We have decided to keep a watch on overall expenses. If these go up, this should correspond to a rise in business income," said Mathur.

The bottomline of life insurance companies depends chiefly on the pricing of their insurance products, investment earnings and the expenses incurred. In the highly competitive environment, LIC is unable to increase premium rates and, as interest rates are falling, its ability to garner higher investment income is equally curtailed.

As interest rates continue to move southward, the gross yield on LIC's Life Fund has taken a hit. In fiscal 2001, the gross yield went down by 48 basis points to 11.60 per cent (fiscal 2000: 12.08 per cent). In view of the 300 basis point fall in yields in fiscal 2002, the gross yield is expected to fall even more sharply.

LIC has no other option but to reduce costs. Since the opening up of the life insurance sector to private competition, LIC has brought down overall expenses from 21.16 per cent in 1999-2000 to 19.89 per cent in fiscal 2001.

"Productive expenses cannot be controlled across the 2048 branches, but we intend to enforce greater accountability and control," said Mathur. LIC has, in its drive to curtail "controllable expenses", decided to cut down on telephone charges, printing and stationery, as well as rental of real estate, he added. There is also a watch on the travel expenditure, without causing hardship.

The recent cost-cutting spree however, has hit branches where LIC has installed three-minute disconnectors restricting all outgoing calls to three minutes, with the exception of the direct telephone line of the branch manager. "We are unable to hold a reasonably long conversation with prospective clients over the phone, and this is expected to hit the growth of new business," said a development officer who had brought in over Rs 75 crore in new business last fiscal, but does not expect to achieve 50 per cent of the same this year.

LIC has experienced a 65 per cent fall in the growth of new business in the first quarter of the fiscal. Mathur attributed this to the withdrawal of many of LIC's high guaranteed schemes and reduction in the assured rate of returns, as well as the uncertainty over the levy of five per cent service tax on risk premium.

Development officers have further been instructed to restrict the quarterly meetings with their agents within the premises. According to a development officer, a ceiling of Rs 6,000 has been fixed for each of these meetings. The management has also clammed down on stationery costs, having imposed restrictions on printing of material -- proposal forms and new literature -- as even the nitty-gritty items such as pins, pens, refils, paper, writing pads earlier available, have now to be accounted for.