The Life Insurance Corporation of India will face a problem on meeting solvency margin in the next 4-5 years unless the government steps in to capitalise the state-run corporation.

The government's decision to corporatise LIC may resolve the solvency margin issue. The state life insurer cannot indefinitely continue to meet the required solvency margin from the corporation's surplus funds, S B Mathur, chairman, LIC, told Business Standard.

"We cannot take out Rs 3,000 crore (Rs 30 billion) yearly as new investments are being made at market rates, and hence the government will need to take a decision," he said.

Today LIC is relying more on its historical high-yielding investments in government securities to meet annual RSM. However, "the percentage of historical investments are decreasing, and new investments are being made at market rates," Mathur pointed out.

LIC needs to put aside Rs 2,500 crore (Rs 25 billion) to Rs 3,000 crore (Rs 30 billion) towards RSM every year in accordance with its business growth. This is as per the norms laid down by the Insurance Regulatory and Development Authority. At present, this is being met through investment income that gets added to the corporation's surplus funds.

Solvency margin -- like the capital adequacy requirement of commercial banks -- is calculated at four per cent of the liabilities the insurance company could face in addition to 0.3 per cent of sum at risk.

For the financial year 2003-04, LIC will need to put aside an additional RSM of about Rs 3,000 crore, thereby meeting the entire 150 per cent solvency margin. LIC's RSM is in excess of Rs 20,000 crore (Rs 200 billion) and has been calculated for the business written over the last 47 years.

The stock market boom in 2004 saw LIC encashing on past investments, booking a net profit of Rs 3,500 crore (Rs 35 billion) through sale of investments. In a depressed capital market, LIC may find it difficult to add to the required reserves, said top officials.

Private insurance companies are able to bring in additional capital from their promoters to meet payouts, expenses and RSM. LIC, in contrast, operates on just Rs 5 crore (Rs 50 billion) capital from the government and meets all its expenses and claims from internal funds generated through investment income.