The Board's 85 Per Cent
At its meeting on 28 May 2025, the board of the Life Insurance Corporation of India considered the Appointed Actuary's valuation of the participating (with-profits) life fund as at 31 March 2025, which disclosed a surplus of ₹1,240 crore. The Appointed Actuary certified a 95:5 distribution between policyholders and the shareholder, the Central Government. The board, preparing for a partial dilution of the government's holding and keen to show improved return on equity, proposes to distribute only 85% to policyholders and retain 15%, and asks the company secretary to "confirm the legal position". Two further proposals are on the table: transferring ₹180 crore of surplus generated by the non-participating fund into the participating fund to smooth the distribution, and charging ₹45 crore of a proposed brand campaign to the participating fund before arriving at the distributable surplus. Separately, a policyholder association has written claiming that, because sums assured and bonuses are "guaranteed by the Central Government" under Section 37, LIC's board can never reduce future bonus rates.
1. Can the board approve an 85:15 distribution? Explain the statutory basis and the correct process.
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The board cannot approve 85:15.
The distribution of a life insurer's valuation surplus is statutory, not a matter of financial policy. For LIC, Section 28 of the LIC Act, 1956 requires that out of the surplus not less than 95% be paid to policyholders; the general floor for life insurers in Section 49 of the Insurance Act, 1938 as amended in 2015 is 90%. The board's power to manage the Corporation is exercisable subject to the Act, and a board resolution cannot rewrite a distribution ratio fixed by Parliament. Even on the more permissive 90% reading, 85% is unlawful, so the specific LIC provision need not be resolved to answer the question - no permissible floor is satisfied.
Process. The Appointed Actuary's valuation report, showing the distribution, forms part of the actuarial returns filed with IRDAI. The board either adopts the certified distribution or sends it back for re-examination; it cannot substitute its own number. The company secretary should advise firmly against the proposal, have the advice recorded in the minutes, and minute any director's dissent.
Practical route. If the government wants a lower pay-out to policyholders it must amend the LIC Act in Parliament. If the objective is a better return on equity ahead of a listing, that must come from the shareholder's share of profits, expense efficiency and the non-participating book - not from withholding money that belongs to with-profits policyholders.
2. Evaluate the two related proposals: moving non-participating surplus into the participating fund, and charging the brand campaign to the participating fund before distribution.
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Both should be rejected.
Cross-subsidy. The actuarial valuation is done fund-wise and class-wise. A surplus in the non-participating fund belongs to the shareholder (subject to tax and policyholder reasonable expectations), while the participating fund surplus belongs to with-profits policyholders. Moving ₹180 crore between the two to smooth the distribution transfers value from one set of stakeholders to another, distorts with-profits fund accounting and misstates the valuation. Cross-subsidy between funds is not permitted, and it would also mislead the market about the true profitability of the non-par book.
Ad spend. A brand campaign is an expense of management, not a distribution of surplus. It must be charged to the revenue account, allocated equitably across the funds that actually benefit, and kept within the limits set by IRDAI's expenses-of-management regulations. Deducting ₹45 crore of brand advertising from the participating fund before arriving at distributable surplus means, in substance, a levy on policyholders for a shareholder-brand benefit. If the campaign genuinely promotes participating products, a documented, defensible allocation is possible - but not on an arbitrary basis, and not "before arriving at distributable surplus".
The Chief Actuary's objection should be recorded in the minutes, and neither proposal should be approved without written consultation with IRDAI.
3. A policyholder association argues that the Section 37 guarantee means future bonus rates can never be reduced. Is that correct?
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The guarantee is narrower than the association claims.
Section 37 of the LIC Act, 1956 guarantees payment in cash of the sums assured by policies issued by the Corporation and any bonuses declared in respect of them, the guarantee being met by the Central Government if the Corporation's assets are insufficient. Three consequences follow.
- It attaches to declared bonuses, not future ones. Once a reversionary bonus is declared and attaches to a policy, it forms part of what is guaranteed. Future bonus rates remain a matter for the Corporation and its Appointed Actuary, subject to policyholders' reasonable expectations and the asset share of the fund.
- It is a credit guarantee. It protects the policyholder against the Corporation being unable to pay, not against a reduction in future bonus declarations. A sovereign guarantee of solvency is not a promise of a fixed return.
- It does not touch surplus distribution. The ratio and the fund accounting are governed by Section 28 and the Insurance Act, not by the guarantee.
So the association is right as to declared bonuses and wrong as to future bonus rates. The board's reply should draw that distinction clearly rather than sheltering behind the guarantee, because telling policyholders their bonuses are "government guaranteed" in a way that implies fixed future returns is itself a misrepresentation risk.