Over 752,000 insurance policies of the Life Insurance Corporation of India have lapsed.

The sum assured involved in lapsed policies -- in excess of Rs 47,000 crore (Rs 470 billion) -- has grabbed attention of India Inc.

With returns averaging nine to 12 per cent in these policies, large cash-rich corporates have started investing in tradeable insurance policies.

TIPs -- an investment instrument offering assured, high returns against the maturity of a life policy -- promises the purchaser the sum assured plus all the benefits that would accrue to the policyholder on maturity and during the life of the contract.

TIPs are bought and sold in the market today after the original LIC policyholder assigns all the rights and benefits to the investors who offers a price higher than the surrender value for the lapsed risk cover.

As this instrument helps revive a lapsed policy, LIC stands to benefit both in terms of past premiums paid plus interest thereon at 12 per cent per annum.

Credit rating of TIPs will further drive sale of the product among banks, mutual funds, charitable trusts, provident funds and clubs with huge deposits lying in bank accounts, said Insure Policy Plus Services vice chairman Ketan Mehta.

Insure Policy Plus Service is among the first market-makers specialising in purchase of lapsed policies and converting them into TIPs. It has already initiated talks with a leading credit rating agency to rate the financial instrument.

"The credit rating will be taken on LIC and not us. With its sovereign backing, this will help drive sales as we believe there is a huge market for the product," said Mehta.

He estimated a market size in excess of Rs 20,000 crore (Rs 200 billion) to Rs 25,000 crore (Rs 250 billion) in terms of lapsed policies of LIC alone. Lapsed policies of new players have yet to acquire surrender value and hence will take a year or so to create a market.

LIC's latest available balance sheet (2001-02) indicates a rise in the percentage of net lapses to mean life insurance business in force from 4.9 per cent in 2000-01 to 5.5 in 2001-02. It further shows that over 75 lakh (7.5 million) policies have lapsed as on March 31, 2002, (against nearly 65 lakh in fiscal 2001).

These possess an aggregate sum assured valued at Rs 47,669.5 crore (Rs 36,597 crore). On the same, reversionary bonus additions are to the tune of Rs 2,566.83 crore (Rs 25.67 billion).

TIPs is a big business in developed nations like the US and the UK. Estimated at over one billion pounds, the market is growing at the rate of 30 per cent annually in the UK. Many leading investment banks have separate division specialising in the purchase and sale of insurance policies.

It is a win-win situation for all parties concerned. The assignment of the policy to a new holder helps revive lapsed policies, and helps lower the lapse ratio for the insurer.

At the same time, the agent gets his annual renewal commission, while the original policyholder gets more than what he would have got as surrender value from the insurance company. The individual with the highest stakes gains in terms of high, assured and tax-free returns.

Following LIC reducing its annual bonus by about 10 per cent, Mehta said this would bring down investment returns by around one per cent.

"Future returns will go down a bit, but with interest rates moving south, TIPs has attracted a lot of investor demand in the country," he added.