Whenever we try to buy an insurance product from a private insurer, then all of us have a huge concern like “What if my insurance company goes bankrupt in India?”. Because since long we believe in LIC and not in private insurers. Let us see this what IF.
There is a huge crowd of LIC agents or believers who strongly propagate the idea that LIC is SECURE. Because it is backed by the Government of India. Therefore, no cause of any such default or bankruptcy. Hence, if we want to invest in any insurance product then it must be with LIC only.
However, there are some other people, who propagate the idea that private insurance companies are as safe as LIC. So whom to believe?
Let us see some rules and regulations attached to regulating insurance companies in India.
Who can start Insurance business in India?
It is not you or I can start a business by registering the company. The company needs IRDA approval. However, there are some strict rules attached to it and will be monitored by IRDA. The company must have proven track record of at least 5 years with profit in each quarter of a financial year. Capital required to start a business is Rs.100 Cr. IRDA can suspend the license of a company in case it found to be-
- If company acted in a prejudicial manner to any particular customer.
- Fails to furnish information requested by IRDA.
- Does not provide periodical returns.
- Does not co-operative with IRDA during the time of inquiry.
- Indulge in manipulating the insurance business.
- Fails to make investments in social and infrastructure as specified under insurance act.
- If the central Government demands of cancellation.
- If the insurer default to insure.
What is the solvency margin of an insurance company?
It is nothing but a cash reserve the insurer has to keep in order to pay the claims during an emergency. IRDA requires the insurance companies to maintain a particular level of solvency margin for their smooth functioning. In other words, it is a size of capital relative to the risk it has. If an insurance company insured Rs.1, 000, then they have to keep aside Rs.1, 500 with IRDA as a solvency margin.
Let us say due to earthquake or any unforeseen accidents, an insurance company faced the huge cash requirement to settle the claim. In such situation, this solvency margin is utilized for any such emergencies of company need. As per IRDA rule, this solvency margin must be 150%. Higher the solvency margin indicates company better equipped to pay off its debt and can sustain in the long run.
You can check the latest solvency ratio of all insurers in the IRDA Annual Report. LIC manages the LOWEST SOLVENCY RATIO!!! Why so? Because, for LIC if it is managing less than mandatory solvency and if any such emergency arises then the Government will back and infuse the fund to manage it. Then who is using this money (by keeping the lowest solvency ratio)? It may be either Government or LIC. If they both are using it and actually generating better returns on it, then why can’t pass the same to all LIC customers?? No data on how it is utilized and in what way Government or LIC benefitting to customers.
Below is the list of companies with their solvency margin as per IRDA Annual Report 2013-14.
Even if a company decided to close or wind up the business then what?
If any private company willing to wind up its business, then they can’t do as and when they wish. There are some regulations to it also. If any company willing to wind up an insurance business then it has to merge with a new company and then bail it out of this business. In this way, an insurance company can’t close business and run away from the responsibility towards an insured person. The detailed guidelines are available HERE (You can read if you are interested).
Therefore, when it comes to insurance regulation, including LIC all companies are equal and have to adhere to rules of IRDA. Hence, without any hesitation, you can buy an insurance product with private insurers too.
Hope with these strict regulations it is hard for any company to wind up its business overnight. Any suggestions, points or doubts??