The Hindu Business Line : Insurers need capital infusion as business grows

WITH the Government unrelenting on raising the foreign equity threshold in the insurance sector, foreign companies have found new methods of shoring up the capital in their respective domestic joint ventures.

Sources said that the capitalisation in the domestic life and non-life ventures was being done without upsetting the current foreign equity limits. At present, the foreign equity limit prescribed in the insurance sector is 26 per cent. Domestic partners are expected to hold the remaining 74 per cent stake.

Sources said the preferred method currently adopted was a warehousing mechanism. This method allowed the domestic partner to hold the equity stake on behalf of the foreign joint venture partner. The foreign partners, the sources said, advanced long-term external commercial borrowings (ECB) for meeting the capitalisation share of the domestic JV partners in the insurance venture.

Currently, only few domestic partners are in a position to meet the capitalisation requirements. The remaining domestic partners are first time entrants in the business and lack the financial muscle needed to meet the long-term capital requirements of the insurance business.

Life insurance, the sources said, tended to be capital-intensive at least for the first seven years and there was no escape from losses. In fact, losses during the last year had mounted, partly on account of the high claims the industry has suffered due to natural calamities and on account of depreciation of their investment portfolio, in particular government securities.

The warehousing mechanism was partly facilitated by the liberal norms applicable for raising ECBs. The advantage conferred by this mechanism was that it allowed compliance with the existing regulations for foreign and domestic equity within the prescribed ratio.

Moreover, the sources said, that this kind of warehousing also allowed the insurance companies to meet their capitalisation requirements in line with the prescribed solvency margins. This was because customer addition implied increasing liabilities.

The sources said that capital infusion was necessary to sustain the high growth rates and at the same raise the insurance penetration to global levels. The new life insurance players were now focussing on bulk business such as group and pension businesses. Insurance penetration, both life and non-life, has improved to about 2 per cent of the gross domestic product from about one per cent two years ago. Private sector life insurance has grown by 73 per cent during the first quarter of this fiscal as against the industry average of 10.2 per cent. Non-life has grown 57 per cent during the same period.

Moreover, the sources said, that even to sustain the current levels of penetration, more capital would be required in view of the high GDP trajectory of the country. Estimates are that for every one per cent growth in the GDP, insurance sector growth is anywhere between 3 and 4 per cent. Similarly, for non-life insurers the objective is to reduce reliance on reinsurance and improve domestic capacity and retention.

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