Components of Valuation Surplus-The myth of adverse impact of pension upgradation

Dear Mr Sahni,

I happened to glance at the article of Mr R Ramakrishnan on Analysis of Valuation Surplus in the link published by you.

I found the following para very significant from the angle of relevance of  LIC’s financials affecting rewards to policyholders which came up in the Delhi HC in which LIC was able to have its way by harping on upgradation of pension eroding the valuation surplus to the detriment of policyholders.

Mr R Ramakrishnan writes:

“ Components of Valuation Surplus 

11) The main components of the valuation surplus are,  a) Premium income,  b) Marketing expenses (including agency commission),  c) Administrative expenses, d) Claims,  e) Investment income, f) Lapses and Paid-up, g) Revivals, h) Surrenders, i) Provision for Future Bonus and j) Impact of elimination of negative liability.”

Thus there are ten components of valuation surplus out of which three items have an income angle while the remaining 7 have an outgo impact.Out of the outgo components,administrative expenses are only one among the seven components constituting 20% of the total outgo.Again,the additional contribution to pension constitutes but about 30% of Salary Expenses which again forms only a part of administrative expenses excluding commission expenses.

It does not require actuarial acumen to conclude that the nine components excluding administrative expenses have more potential to impact the valuation surplus either on the positive side or negative side depending on the working of the Corporation in terms of new business growth, qualitative productivity of marketing personnel,quality of new business,effective investment of policyholders’ Fund including control on Non-Performing Assets,conservation of business,arresting surrenders and economy in operations in general.

Viewed from this perspective,the impact of additional liability of the Corporation on account of upgradation of pension to a potentially vanishing tribe of LIC Pensioners pales into insignificance.

In fact I had sent an article for publication in ‘Yogakshema ‘ magazine a month ago,but I have no information on its possible publication.I propose  to send the article fo the blogs after my return to Hyderabad on 20th inst.

My point in writing this is that we need not be defensive in the Supreme Court if the financial impact bogey is raised by LIC  again in the course of arguments,where our case is very strong on points of law.

Kind regards.

C H Mahadevan 

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