4 Is LIC a small saving company or a life insurance company?

Bulk of LIC’S business comes from policies which are technically life insurance products but very different from the manner in which life insurance is understood in the risk aversion sense. This is because the sum assured in such LIC policies is a very small amount (the policy holder is actually expected to pay a very big fraction of it during the term of the policy and gets this money back with a small return after completion of the policy period) compared to what would be needed to compensate for the policy holder’s future stream of earnings in the event of his death. Policies which offer a large amount in the event of death are also known as term insurance policies and in these products the policy holder does not stand to gain anything if he lives through the period of the policy.

The dominance of policies which offer a sum assured on maturity in LIC’S portfolio means that it is more a small savings company than a life insurer in the strict sense of the term. One statistic which captures the lack of term insurance type of policies in LIC’S portfolio is the small share of reinsurer’s premium – insurance companies seek a reinsurance on the insurance they sell to their clients and this amount will be significantly higher if the sum assured is higher – in LIC’S total premium earrings. LIC’S small savings driven business model is going to be a headwind for its future business as retail investors in India move to new opportunities such as equity and debt markets and the tax incentives for small savings are diluted with steps such as the government announcing two kinds of income tax slabs with lower rates on the one without any exemption for investment in LIC style products.