What are Participatory Funds and Non-Participatory Funds? Th | Indian Economy -Civil Service Gurukul
What are Participatory Funds and Non-Participatory Funds?
The amendment to Section 24 of the LIC Act, brought prior to commencing the IPO, segregated the previously single 'Life Fund' into the participatory and non-participatory funds.
Under a participatory policy, a policyholder can get a share of the profits of the company.
This is received as a bonus. Examples of such products offered by LIC include Jeevan Labhand BachatPlus.
No such sharing of profits happens under non-participatory products, which under the LIC fold includes policies such as Saral Pensionand Nivesh Plus.
As all insurance companies do, LIC also reinvests premium monies that policyholders pay.
The profits or surplus that comes about, as a result, was till September last year held in one single fund. This was the Life Fund.
The surplus was divided in the 95:5 ratio between policyholders(in the form of bonuses)and shareholders(in the form of dividends).
What has the Amendment changed?
But the amendment to Section 24 of the LIC Act has necessitated the segregation of the Life Fund into participatory and non-participatory funds, depending on the nature of the policies they support.
The amendment stipulates terms on how surplus is to be shared with respect to participatory and non-participatory funds.
As for non-participating funds, surplus from the non-participating business would be transferred to shareholders.
Surplus from participatory business, however, would be shared between policyholders and shareholders.
How does this change impact the shareholder?
The change, especially the one that has enabled 100% of the surplus in non-participatory funds to flow to the shareholder, has led to a massive jump in the Indian Embedded Value, or IEV.
IEV is a measure of future cash flows in life insurance companies and the key financial gauge for insurers.
The embedded value will help establish the market valuation of LIC and determine how much money the government raises in the flotation.
That will be crucial for the government to help meet its divestment targets and keep its fiscal deficit in check.
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