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Saturday, April 23, 2011

Enhanced Gratuity Provisioning of Public Insurance Companies

IRDA, in a recent circular, has notified that pay revision of the employees of the Public Insurance Companies has been carried out and the maximum gratuity provisioning has been increased from the current Rs 3 lakhs to a maximum of Rs 10 lakhs. Gratuity is a payment made to employees who have served for more than 5 years in an organisation. Gratuity payment is calculated as 15/28 of monthly basic pay for every year of completed service, which is paid out when an employee retires or leaves the organisation. Gratuity liability calculation of a company involves detailed actuarial calculation, and every company must make provisioning for the gratuity liability. 

Earlier, the maximum gratuity limit was fixed at Rs 3 lakhs, but now it has been revised upwards to Rs 10 lakhs. Public Sector insurance companies, which have a significant number of employees who have served significant number of years in service, will have to make a far larger provisioning for their gratuity payouts. This will have a negative effect especially on the 4 public sector general insurance companies which are already reeling under significant accumulated losses and will put further strain on their solvency ratios, needing more capital infusion.

IRDA however has given a timeline of upto 5 years to make this increased provisioning @ 1/5 of the increased provisioning every year.

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