Hi Friends,

This is the final part of the blog “Is LIC the best insurer for you” where Mr. Sharma and Mr. Nalanda are having conversations about LIC Policy. You can refer the previous 2 parts of the blog by clicking here

Mr. Sharma- What is average claim settlement amount sir?

Mr.Nalanda- The average settlement amount is the total amount settled by the insurer when the policy is presented for the claim. If you see the below table, you will be astonished to see the LIC ranking.

Average Claim Settlement Ratio 2017-18
Source – Basunivesh.com

Mr. Nalanda- Can you check this table (handing over the above table to Mr. Sharma). This table shows that average claim settled by LIC is less than Rs. 2 lakhs even though it has highest claim settlement ratio. Aegon, and Aviva are insurers whose average claim settlement amount is above 75 lakhs. LIC stands 2nd last after Sahara in this table. I don’t deny that LIC settles most of its policies but the amount it settles are majorly those whose settlement size is not more than 10 lakhs.

Mr. Sharma was sweating now. Putting aside the paper in the table, Mr. Sharma was ready to answer to Mr. Nalanda for this.

Mr. Sharma- Sir, agreed that average settlement claim amount is less than 2 lakhs but you have a guarantee for LIC. Insurance is not a one time affair but a long term contract between insurer and customer. Suppose you take a term insurance from one of the private company for say 30 years. You pay the premium and you are covered for Rs. 1 crore. What if the company from whom you have taken Term Insurance gets liquidated or close down its shop. Nowadays even big corporates go bankrupt but this is very remote possibility with us. We have a market share of 72% during April to Sept 19 in life insurance business (source- economic times 14th Oct 2019) . LIC is been here from last 63 years earning trust of people which is not the case with your private insurers. You can take an example of Jet Airways, India’s most loved private airline, too closed down.

Mr. Nalanda – Agreed Mr. Sharma that there can be situations like this but do you know its not easy to close down the insurance business once the license is granted. Here are few of the points which I will mention to clarify your doubt.

  1. Insurance business is directly governed by IRDA. The same authority which monitors LIC so you need no to worry about compliance and regulatory framework.
  2. To get insurance license, a company needs to have 5 years of profit in each quarter of the financial year. After fulfilling this condition, license is been granted by IRDA to the entity who wish to start Insurance business.
  3. Minimum Capital required to start insurance business is Rs. 100 crores. This amount is to be deposited with IRDA. This shows only the wealthy companies can start an insurance business.
  4. A solvency ratio margins is required to be maintained by each insurance company. (solvency ratio is an amount of money to be kept by insurer with IRDA in order to pay the claims during exigency.
  5. Current Solvency ratio is 150% of the liability i.e if the liability of the insure is say Rs. 100 then insurer has to maintain Rs. 150 as reserve in order to settle the claim of the insured.
  6. A higher solvency margin depicts insurer’s capability to settle the claims and sustain in the long run.

Mr. Nalanda – Do you know Mr. Sharma what is the Solvency ratio of LIC?

Mr. Sharma – No, Sir.

Mr. Nalanda- Why dont you refer this table. (Mr, Nalanda hands over another paper to Mr. Sharma)

image 1
Source- IRDA Annual report – 2017-18

Mr. Nalanda- The Lowest solvency ratio in thia table is of LIC which is just above the minimum requirement. Lastly your question regarding sustainability, I would like to mention that no Insurance company is allowed to shut down the insurance business. A company cannot shut its insurance business on its own desire. It has to instead merge with a new company in order to serve the existing customers. An insurance company cannot run out of its responsibility towards the insured. Therefore all companies have to comply with the regulations of IRDA including LIC.

Mr. Sharma in a speechless mode but still trying to sell the policy.

Mr. Sharma – Sir, I still believe that LIC supports you at your tough times. I guess no insurer provides you any loan basis your term insurance policy. If you take this loan, then LIC provides you loan basis your surrender value and other conditions. Doesn’t this save you from procuring any loan from other bank who charge such a high rate of interest?

Mr. Nalanda- Agreed Mr. Sharma, but do you know now you get loan against you mutual fund?

Mr. Sharma- Loan against Mutual funds? Are you joking

Mr. Nalanda- Yes, recently HDFC has started giving loan on your mutual funds upto Rs. 2 lakhs. Other than HDFC there are other NBFC’s and entities who provide you loan above Rs. 2 lakhs against your mutual funds. So even that part is taken care of.

Mr. Sharma (somewhat irritated)- Sir, if you know so much then why have you called me for LIC policy. You could have simply taken the Term insurance and invested in Mutual funds.

Mr. Nalanda without uttering a word having taking the last sip of tea smiles on his own.

Thanks for reading this post which stretched to 3 parts. If you like this post then send your comments and subcribe to my blog for more such interesting topics.

Disclaimer – The views expressed in this article is the author’s view and in no way assures that this would be the best combination of investment and insurance for everyone. For any suggestions, please identify your requirements and check with your Investment and Insurance advisor for the optimum returns on your money.

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