LIC Bans Lapsed Policies Trade In Secondary Market

Mumbai, Nov 16: | Updated: Nov 17 2003, 05:30am hrs
Fearing cannibalisation of its new business, the Life Insurance Corporation of India (LIC) has totally banned high potential secondary market transactions in any of its lapsed policies (policies which are inoperative due to non-payment of premium). This practically nips in the bud a market of Rs 3,000 crore.

The secondary market for tradable insurance policies (TIP) in the life insurance segment is a new concept in the country where the original policy holder manages to sell his lapsed policy to another buyer (who may be an individual or an institution) with a bit of discount who revives the policy and receives all the returns and benefits of the policy the original buyer is entitled for.

State-owned LIC, which has almost over 70 lakh lapsed policies with a premium value of Rs 2,500 crore, has issued a circular to its branch offices banning any transaction of these lapsed policies.

Confirming the development, a top official of the corporation said the step is necessary now as it would have affected sales of new policies.

A domestic secondary market for life insurance policies is non-existent in the country, he added. Market sources point out that a big market for the lapsed tradable life insurance policies would not augur well for the LIC immediately though the corporation would have benefited once again by reviving the premium flow of dead policies as these lapsed policies are comparatively offering high return than the new policies. A three-year old lapsed policy of LIC, which can be traded in the secondary market, can offer a guaranteed return of almost 12 per cent, whereas currently, LIC does not have any guaranteed policy and returns from any of its policies are not beyond 4-5 per cent.

Referring to the benefits LIC would have received by having the premium of the lapsed policies, the official clarified that the institution is prepared to give all kinds of support to original policy-holders in case they want to revive the policies.

We give all kinds of encouragement to help the policy-holders revive the policy within a specific time frame, and they do not have to depend on the secondary market to revive their policies, he averred.

At present, the purchasers of the tradable insurance policies are not only high net worth individuals but also institutional investors such as mutual funds and provident funds which are looking for high-yielding instruments in the falling interest rate regime.

The secondary market for life insurance policies is a big business in markets like the US and UK. This market is growing at a rate of more than 30-40 per cent in these markets.