LIC cuts notional loss in three schemes by 5%

Life Insurance Corporation of India (LIC) brought down the cumulative ‘notional loss’ in three of its pension plans by around five per cent from Rs 14,000 crore in the year ended March 2010, a senior LIC official said today.

The 54-year-old company is looking at new avenues to reduce its costs and increase profit. It expects to save about 0.25 basis points from the one per cent expense on older schemes. Its average expense ratio is 5.6 per cent, that includes costs on new policies, the official said.

Over the past year, the life insurer has increased trading in government and corporate bonds following growing competition from private sector insurance companies. Earlier it used to stock up most of its investment in debt until maturity and would not book profit during changes in interest rate cycles.

One of the policies, Jeevan Akshay – an immediate annuity scheme that promised one per cent per month (12 per cent a year) – was launched in 1987. At present, Jeevan Akshay-6 is being offered at seven per cent. The two other policies – Jeevan Dhara and Jeevan Suraksha – were deferred annuity plans.

While in 1987, LIC had the comfort of 20-year government securities (g-secs) being offered at a high rate, things changed in the following years when more policyholders entered the scheme. The rate of return in g-secs had come down by then but customers were still to be paid at the same rates. “These ‘notional losses’ are basically actuarial estimates and have accumulated over time. It would have started almost 10 years back,” the official explained.

Post 2006, when the 20-year government paper matured, the insurance company had to look for other investment avenues to get the required returns for this policy, which under the prevailing interest rate regime was much lower.

LIC officials said that while the surplus goes into a common pool, the notional/actuarial estimate of losses are made a part of the scheme. The surplus generated by various investments is put in a common pool and 95 per cent of that is distributed to policyholders and the remaining five per cent goes to the government.

“Details of schemes, investments and returns are all filed with Irda and the regulator is aware of all issues and has not commented on it since its actuaries understand the policies and that there is no actual loss booked on the schemes or a hole in LIC’s books,” he said.