Four of LIC’s own operations pose a challenge

Regional concentration in 5 states: The The insurer may have a pan-Indian presence and is the largest insurer in the country, but its business is concentrated in a few regions, as it indicates in its Draft Redemption Prospectus (DRHP). Almost half of its new Individual Enterprise Premium (NBP) comes from Tamil Nadu, Maharashtra, Gujarat, West Bengal and Uttar Pradesh. For the fiscal years from 2019 to the six months ended September 30, 2021, these five states contributed 49.77%, 48.99%, 49.21% and 47.54% of the company’s total individual NBP, respectively.

Sales support based on individual agents: The trend towards concentration extends to the medium through which policies are sold. Individual agents are the primary mode of distribution for LICs. Some of LIC’s products can be purchased online, but not through third-party websites, which other insurers offer. Recognizing this shortfall, the insurer mentions in its DRHP: “If our products remain unavailable for purchase on third-party sites, we risk losing market share.

Linked by fixed income products: Many of LIC’s products are limited fixed income products, so “rising interest rates could lead to higher levels of surrenders and withdrawals from existing policies as policyholders seek to purchase products with yields perceived higher”. The amounts and types of long-term fixed income products in Indian capital markets are limited, and regulations require insurers to invest in certain types of products (such as government securities). This “could significantly limit our ability to closely match the duration of our assets and liabilities and thereby reduce our interest rate risk,” LIC DRHP said. If a situation arises where policyholders surrender their policies mid-term, the insurer will have to sell its invested assets to make cash payments to policyholders “at a time when the prices of those assets decline, which, in turn, would lead to LIC incurring losses.”

Duplication in housing finance: The concentration of housing finance activities can also be a problem. In January 2019, LIC acquired IDBI Bank, which means an overlap of the two housing lending activities (of LIC Housing Finance and IDBI Bank). The Reserve Bank of India has stipulated that only one of these two countries can continue its housing finance business. “…the RBI in its approval letter has stipulated that either IDBI Bank or LIC Housing Finance Limited…shall cease carrying on housing finance business within five years from the date of the approval letter approval and that the housing finance activity will only be carried out by a single entity”, specifies the DRHP. In addition, LIC must adequately capitalize IDBI Bank to ensure that it meets minimum capital requirements for a period of at least five years. This could adversely affect LIC’s financial condition, results of operations and cash flows.

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