LIC: New Rules to Lower Investor Charges

As chairman of state-owned Life Insurance Corporation of India, T.S. Vijayan is one of the most powerful men in Indian finance today.


With $238 billion in assets, LIC is the country's largest insurance company, holding 70% of the life insurance market by premiums and number of policies. It is also the single largest investor in India's stock market, owning around 5% of the market's total value. LIC invested nearly $13 billion in Indian stocks in the year ended March 31.

The mild-mannered Mr. Vijayan, 57 years old, has been steering LIC since May 2006. Under his leadership, the insurer's profit, or "valuation surplus" as the company calls it, has grown by nearly 50% to $4 billion. LIC gives 5% of its profit to the government, and distributes the rest among eligible policyholders as a bonus.

Mr. Vijayan met with The Wall Street Journal recently. Edited excerpts
WSJ: Where is India's insurance industry headed?

Mr. Vijayan: Until 2000, in India, Life Insurance Corp. was the only player offering life insurance. Then the Insurance Regulatory and Development Authority came into being, which started giving licenses to private companies.

Now there are more than 22 private players.

The industry has been evolving bit by bit over the last 10 years, in tune with what's been happening in the Indian economy itself.

The distribution channels have expanded, from just direct agents of the company to now corporate agents, bancassurance [selling insurance through banks.] Products have also evolved. Unit-linked plans came into being. [These are a type of life insurance policy in which a part of the premium is invested in stocks or bonds, at the risk of the policyholder.]

Insurance penetration has grown tremendously. But India has still got a very huge potential for insurance, provided companies find the appropriate products and the right distribution mechanism is put in place.

WSJ: New rules for unit-linked plans come into effect on Sept 1. Are these too harsh?

Mr. Vijayan: Any regulation that is favoring the customer can not be termed too harsh. It may be that the margins of insurance companies get squeezed.

WSJ: How are the new rules good for policyholders?

Mr. Vijayan: In India, insurance is linked with savings. The new rules require a minimum five-year lock-in for all unit-linked plans [up from three years.] If money is being saved for the long-term, any policyholder will benefit. That's reflecting the spirit of insurance.

Another major change is that the charges will be lower. Insurance companies will be forced to cut their expenses. For instance, the new rule requires that fees for surrendering a policy within a short period of time be lowered.

LIC is comfortable. Previously also we never had any surrender charges.

WSJ: Will these changes cause some private players to shut shop?
Mr. Vijayan: This may not force rationalization in the industry per se.


Companies will be forced to contain expenses. They will have to focus on generating more volumes. They are already doing that. Look at their recruitment of agents; the number has been going up.

WSJ: Will these rules curb misrepresentation in sales of insurance products?

Mr. Vijayan: Mis-selling is everywhere. For many years, a soap was being sold in India as if it was used by film stars. I don't think any of the film stars were using it. Isn't that mis-selling?

In insurance also there have been exaggerated claims of returns. IRDA has come very heavily on it, requiring all sales literature to be approved by it.

Since we are a very big company with 1.4 million agents, we are very, very conscious of it. There is a possibility that some rogue element somewhere may make exaggerated claims but we are very strict about it.

WSJ: Financial literacy is one of the biggest challenges in India. How is LIC pitching in to promote this?

Mr. Vijayan: Debate and discussion in the media helps raise awareness.

When the insurance industry was liberalized in 2000, there was opposition to it. It generated a huge amount of media debate. All of that contributed to a jump in the [size of the] pie itself. Life insurance premiums have gone up from less than 2% of India's gross domestic product to 4% in 10 years.

So an integral part of this awareness program is how the general media takes up issues.

We are also working to increase education through our agents. Last financial year we sold 38.8 million policies. That means, 38.8 million individuals have been told something about insurance.

Of course, there's a lot to be done. The education has to become more sophisticated now that we have new products which don't guarantee returns to the customer.

WSJ: Any other initiatives?

Mr. Vijayan: Our information technology initiative has been a major change in recent times. It has helped us become more efficient and increase out productivity. Otherwise, we would not be able to service 250 million policies at such low cost.

WSJ: When can we buy insurance policies online?

Mr. Vijayan: We are not offering that yet.

But now one can pay LIC premiums at any branch across the country, or in selected banks, and also through our web site.

We have embarked on a very ambitious project of a paperless office by scanning all papers. Around 70% of the work is over. Three years ago, we built up a huge data warehouse and now we have management information systems which help us analyze the profitability of our products and campaigns very quickly.

Now, we're trying to restructure our work.

Traditionally, the branch office has been the hub of all policyholder documentation.

We want to liberalize that so you can do transactions, like getting a claim, or changing the address or nomination on a policy, through any branch across India.

WSJ: What about mobile?

T.S. Vijayan: Mobile is evolving. We are in discussions with two to three banks to tie-up such that if you have a bank account with them, you'll be able to use your mobile to transfer funds to pay your premium. We should be launching it soon, probably this year.

WSJ: What are LIC's plans for overseas expansion?

Mr. Vijayan: We have operations in seven countries, where there's a lot of Indian diaspora, among whom LIC is a big brand. In the Gulf countries, for instance, people want to take policies and bring them back to India one day.

This fiscal year we expect to start operations in Singapore.

WSJ: You are one the largest investors in India's stock market. What do you make of the recent volatility in markets?

Mr. Vijayan: Overall, stocks have been creeping up. I believe that will continue. Basically, it reflects the Indian growth story. Most of the stocks are led by Indian consumption

As long as policyholders trust their money with us, we'll remain bullish

WSJ: What do you think of the pension market in India?

Mr. Vijayan: Pension products have to become more predominant here.

Until some years ago in India, government was the major employment provider. Today, the private sector has become a big employer but their employees don't have any government-guaranteed pension. They have to build their own pension fund.

Pension has got two stages – the investing stage and withdrawal stage. All the debate and products have so far focused on the accumulation and investment stage. But more products have to evolve at the payout and annuity stage. That's a lucrative market.