Sovereign guarantee for all policies issued by Life Insurance Corporation ( LIC ) will continue, a government official said, allaying fears of millions of clients of the country’s largest life insurer.

The government has decided to drop a clause from the Life Insurance Corporation (Amendment) Bill 2009 that suggested limits on the sovereign guarantee available to the country’s largest life insurer.

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The finance ministry has circulated a draft cabinet note on the changes to be made to the legislation before it is taken up for approval in the monsoon session of Parliament.

LIC, which is governed by a 50-year-old Act, has Government backing for all its policies. The public-sector behemoth had 65% market share in first-year premium and 70.8 % share in total policies in 2010. The insurer sold over 37 million policies in the last fiscal.

The relaxation in sovereign backing comes despite the government tightening conditions under which such guarantee can be made available.

The bill also seeks to allow LIC to allocate 90% or more such surplus – excess of assets over liabilities – for life insurance policy-holders and the rest to a separate account maintained by LIC.

The account would be utilised by the government for any purpose it decides on, while the rest would be paid as dividend. At present, the insurer is required to set aside at least 95% of the surplus, while rest goes to the government.

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