Financial Daily from THE HINDU group of publications
Wednesday, May 18, 2005
Financial Daily from THE HINDU group of publications Wednesday, May 18, 2005 |
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Money & Banking
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General Insurance As investments take a hit, private insurers face solvency pressure C. Shivkumar
Bangalore , May 17 FACED with depreciation in the value of investments, most private sector insurance companies have come under severe solvency pressure. Sources said that unlike the public sector companies, the private sector insurers' investments were mostly in low coupon government securities. Most private sector companies had built up their portfolios during the period when yields were soft. Though some had acquired limited volumes of high coupon securities, they were picked up at the then prevailing yields. However, since the beginning of the last fiscal year, yields on securities have steadily hardened. The hardening of the yields in turn reflects in a drop in the value of the investments - G-secs. The fall in values of G-secs has been steep especially in the case of low coupon securities. Yields, as measured by the ten-year benchmark security, have hardened by around 200 basis points since the beginning of the last financial year to around 7.20 per cent. The sources said that this automatically exerted pressures on the solvency margins of the insurers. Under current guidelines, the value of investments is expected to be higher than that of the liabilities. Liabilities include the gross value of the insurance cover provided, net of reinsurance support. Since the last two years, private sector insurers have steadily increased their market share to about 20 per cent. The increases have taken place at the cost of the public sector insurers, especially high value covers. But the sources said that as solvency pressures mount, the growth of the private sector is likely to considerably decelerate in the coming months. The sources said this was partly because international reinsurers were increasingly becoming discretionary about providing support to domestic primary non-life insurance companies. This was especially so given the low capitalisation of the private sector companies. On the other hand, the public sector was better capitalised, at over Rs 10,000 crore. Moreover, the sources said that international reinsurers preferred providing support to primary insurance companies that have high retention capacities. In this kind of a situation, the sources said, public sector companies clearly have the edge. Moreover, they added, if the private sector was to be able to sustain the growth pace and simultaneously offset the depreciation in assets, it would have to resort to greater capitalisation. Capitalisation, however, is still a sticky issue. The Government has still not permitted any liberalisation in the dilution of foreign equity holding norms in domestic insurance companies. Foreign stake in domestic private sector insurance companies is limited to 26 per cent. Accordingly, the sources said, the bulk of the capital would, therefore, have to be brought in by the domestic partners. The sources said that the ability of domestic joint venture partners to provide equity support was limited. This would imply that the equity support would have to come from the international partners to sustain the growth. Foreign partners were willing to provide the support but that would result in a dilution in the foreign equity norms.
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