The Hindu Business Line : Private insurers face recap pressure

FACED with a dip in the value of investments, private sector insurers, both life and non-life, are now under pressure to recapitalise to sustain their growth momentum.

Sources said the capitalisation was necessitated since the bulk of the investments of the new generation insurers were in low-coupon gilts. These securities have sharply dipped in value since the last two months. The drop in value was expected to impact the solvency of the new generation insurers, the sources said. Insurers traditionally hold such securities till their maturity.

Only a few of life insurers have long-dated securities with high coupons. Even these long dated securities were acquired when the prices were high. This was also because private sector insurers entry came at a time when markets were awash with liquidity. Some of these acquisitions for instance were made, when the ten-year yield to maturity was in the range of 5.5 per cent. Presently, it is well over 6 per cent.

Most of the life insurers have preferred parking all their investments only in government securities or public sector bonds, to have a fixed income stream by way of coupon flows. The sources said that only a handful of the companies had opted for equities. But even equity investments have depreciated in value.

It is the life insurers that are likely to be the worst affected by the falling value of securities, particularly those with large portfolios of endowment plans. This was because endowment plans offered guaranteed returns to policyholders. Similarly in the case of the non-life insurers, the capital requirements would escalate because their liabilities are fixed. Only companies which have a high customer base of unit-linked policyholders and term plans (pure risk plans) would be partly insulated from the risk. In the case of unit-linked plans, the investment risks are borne entirely by the policyholders.

The sources said foreign partners are ready with the capital. Insurers like Aviva have already indicated that they would bring in the required capital. But domestic partners would also have to bring in a larger amount to conform to the current stake-holding norms. These norms prescribe 26 per cent for foreign investors and 74 per cent for domestic investors. The amendment to the foreign holding has so far not been passed as yet by the Government.

However, the requirements were expected to increase, since almost all the insurers have high growth targets for their domestic operations. Consequently the sources said that the actual capital requirements would therefore be much larger than anticipated or the companies themselves would have to pare their growth plans, if investments continue to dip in value.

Only some of the public sector insurers are presently insulated from the capital requirements.

This was partly because the public sector insurers like the Life Insurance Corporation of India and the non-life insurers have a large base of high coupon securities most of which were acquired when prices were low.