All human made entities will END. It is a universal law. Let it be companies, businesses, organizations, a whole religion or an entire country. By the same law, LIC also is no exemption. In this article let us find out the truth about those rumors regarding closure of LIC.
Top 3 reasons for closure of any company
Closure is a business term used, when it is no longer necessary or possible for any person or other organization to continue to operate with the entity that is nearing its end. These are 3 important reasons that results in closure.
A scenario that leads to the shutdown of a company could arise due to the unexpected death of the proprietor. This may result in “No successor or competent authority”. So the business being taken by a competitor and will become a non-surviving entity in a corporate merger.
Revenue or turnover, is the income that a company receives from business activities such as sale of goods and services. Another source of turnovers are from interest and other fees. So Cash inflow is a must have for any company to continue operations.
If an organization is poor at visualizing, it is obvious that the very need for which the organization was created is no longer necessary in the future
Now let us find out how LIC is doing with respect to these 3 conditions.
What is LIC
The Life Insurance Corporation of India (LIC) was founded by the Life Insurance of India Act 1956 passed by the Parliament of India. This rule nationalised the private insurance industry in India. As a result, more than 245 insurance companies spanning across the geography of Indian territory were merged to a single, state owned Life Insurance Corporation.
So in effect Life Insurance Corporation of India (LIC) is a 100% government of India owned insurance group and company. No one person operated institution. So condition 1 above is no longer going to affect LIC.
How Big is LIC
Geographical reach of LIC
Life Insurance Corporation has its central office in Mumbai. For easiness of administration, LIC has 8 Zonal Offices located at Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Kanpur, Bhopal and Patna. Below which comes around 113 divisional offices. Divisional offices control 2048 branch offices and 1,431 Satellite Offices (SOs) and 1,226 Mini Offices. Mini offices are opened as per FM’s budget 2013-14 in all towns of India with a population of 10,000 or more with an objective of Spreading Insurance Awareness and penetration. Mini offices are responsible for immediate customer services required.
Financial Capability of LIC
Fiscal standing of any company can be assessed through their balance sheet and profit and loss accounts. LIC’s Financial statements for the years 2019-2020 are made public as for earlier years. You can have a look here. I’m just incorporating essential details for our discussion.
|Summary of Balance Sheet
As at 30.06.2019 IN RESPECT OF TOTAL BUSINESS
|SOURCES OF FUNDS|
|Share Capital||100 crores|
|Reserves and surplus||557.7557 crores|
|Credit/[Debit] Fair Value Change Account||26.6618 crores|
|Credit/[Debit] Fair Value Change Account||2,08,910.0119 crores|
|FUNDS FOR DISCONTINUED POLICIES Discontinued on account of non payment of premium Others||334,97,818.6921 crores|
|Policy Liabilities||28,73,624.7474 crores|
|Insurance Reserves||9,756.1599 crores|
|Provision for Linked Liabilities||40,749.5091 crores|
|FUNDS FOR FUTURE APPROPRIATIONS||17,29,000|
|APPLICATION OF FUNDS|
|ASSETS HELD TO COVER LINKED LIABILITIES||72,900.7406 crores|
|FIXED ASSETS||2,851.432 crores|
|Cash and Bank Balances||11,139.3829 crores|
|Advances and Other Assets||1,29,466.9414 crores|
|Sub-Total (A)||1,40,606.3243 crores|
|CURRENT LIABILITIES||46,598.325 crores|
|Sub-Total (B)||64,201.9764 crores|
|NET CURRENT ASSETS (C) = (A – B)||76,404.3479 crores|
|MISCELLANEOUS EXPENDITURE (to the extent not||0|
|DEBIT BALANCE IN PROFIT & LOSS ACCOUNT||0|
|Debit Balance of Revenue Account||0|
(Thirty one lakh thirty three thousand seven hundred and seventy seven crores)
So it is quiet obvious that LIC is a flourishing company. So case 2 above for closure also is void.
Our former finance minister late shri Arun Jaitley once said “… LIC has been created as a monolith. If LIC were the company listed on the stock exchange, perhaps it would be the most valued company.”
Insurance industry in India
There are 52 Insurance Companies; 24 dealing with Life Insurance and 28 plying in Non-Life Insurance Business in the Insurance Industry of India. The Sector of Life Insurance in India has witnessed immense growth in the past few years.
As compared to INR 1,75,022 cr. in the previous fiscal, the Total First Year Premium of Life Insurers rose by 10.77% taking it to INR 1,93,866.24 cr. during the F.Y ended 31.03.2018. There was a marked growth of 6.41% in the number of New Policies i.e.from 2.65 cr. in the F.Y 2016-17, it shot up to 2.82 cr. in the F.Y 2017-18.
LIC, has continued to lead the market by grabbing 69.40% of the Market Share in Total First Year Premium and 75.67% in New Policies. The Corporation reported an increase of around 8% in its New Business Premium in the Financial Year 2017-18 i.e. over 1.34 lakh Cr., as compared to over 1.24 lakh Cr. in the F.Y 2016-17.
The Investment of Total Life Fund of the Life Insurance Industry as per the IRDAI Annual Report of 2016-17 was INR 28,54,193 cr. as on 31.03.2017, as against INR 25,02,068 in 2015-16; thereby registering a growth of 14.07%. The Fund has thus shown a considerable increase of INR 3,52,125 Cr. in the year 2016-17 in comparison to INR 2,54,546 Cr. in the year 2015-16.
The share of Financial savings is rising in aggregate Household savings. The Household Financial Savings channeled into Bank Deposits, Life Insurance Funds and Shares and Debentures increased by 82%, 66% and 345% respectively in the year 2016-17. Within the Shares & Debentures category, the growth of savings in Mutual Fund registered a phenomenal increase. In a span of past 2 years, savings in the form of Mutual Fund registered more than 11-fold increase.
The Life insurance industry is gearing up in all modes and methodologies in insuring the vast uninsured population. At the same time, there are current challenges of improving persistency and bringing customized and innovative products.
Already the Central Government’s two Insurance schemes viz; ‘Pradhan Mantri Jeevan Bima Yojana’ and ‘Pradhan Mantri Suraksha Bima Yojana’ has assisted in spreading the awareness about Life Insurance. Adding to it is the new scheme on Health Insurance, where all stakeholders are getting ready to participate to make it a productive one. Overall, these initiatives will help in increasing the penetration and density of the Insurance Industry.
(Source: Insurance Regulatory and Development Authority of India, Life Insurance Council, RBI, Economic Survey of India 2017-18, Key Economic Indicators by Department of Economic Affairs, Ministry of Statistics and Programme Implementation/ Central Statistical Office, National Stock Exchange,Bombay Stock Exchange, Securities and Exchange Board of India,International Monetary Fund, World Trade Organisation)
So for Life Insurance Corporation of India, reason 3 for closure also stands irrelevant.
Why suddenly negative news about LIC is circulating widely in media?
Did you wonder as to why suddenly media is discussing about loss in stock market investments of LIC and giving staggering figures which are scary despite the fact that the value of equity investments which were Rs.3.6 lac Crore has gone up to Rs.6 lac crore in the three year period between June 2016 to June 2019.
LIC issues policies for long term and the average term is 15 years. Like banks or mutual funds LIC do not have redemption pressure and hence investments are made for long term as enjoined in Sec.27 A of Insurance Act. You will find that 75% of the investments are to be made in Central and State Government securities and are made in them.
Besides LIC enjoys sovereign guarantee under Sec.37 of LIC Act 1956, meaning all the policy monies including bonus are guaranteed to be paid in Cash by Central Government. Only LIC enjoys this sovereign guarantee in India.
In-spite of all these facts why these negative news appear suddenly in succession in media. This is for only one reason, jealousy! The extraordinary performance of LIC as an organization in the first five months of this financial year made the market share in premium up from 66.24% in March 2019 to 73.06% in August 2019. This sudden surge in business has rattled many and hence in panic rumors are being spread.
LIC investment in equity is around Rs.5 trillion. One trillion is equal to 1,00,000 Crore. It is 1000000000000. One followed by 12 zeros. Rs.5 trillion is Rs.5000000000000. Since the corporation is a long term investor LIC always make profits in equity markets. SEBI and AMFI says, “..if you stay invested in equity market for long we always make profit..”. LIC is investing in equity market since 1956. How can LIC make loses? Moreover only when the corporation exit their investments from a share, we can book profit or loss? Since LIC have not sold any of their investments mentioned by media, where from this concept of loss arouse?
When the organization grow rapidly, people envious of LIC’s growth will definitely try to stall its progress.
We don’t live in the Jungle
Contradict confidently, is a low & sneaky way that some people use to win arguments, personally or in business, says Paul Sloane in his article. LIC also is just another victim of such vulnerabilities. If you are still in doubt, search and find for yourself, for we are not living in a jungle.