The Hindu Business Line : Govt may hike capital base of non-life insurers to Rs 250 cr

AS part of the restructuring of public sector non-life insurance companies, the Government is likely to raise the paid-up equity capital of each of them to Rs 250 crore.

High-level sources said that the increase in capital was expected to be part of the Union Budget proposals for 2006-07. However, the methods of capitalisation of the four insurers were being worked out, they added. Non-life insurers since nationalisation in January 1973 have never made capital demands on the Government, unlike the banking sector.

At present, three of the non-life insurers — Oriental Insurance Company Ltd, United India Insurance Company Ltd and the National Insurance Company Ltd — have a paid-up equity base of Rs 100 crore and an authorised capital of Rs 200 crore. New India Insurance Company Ltd has a paid-up equity of Rs 150 crore and an authorised capital of Rs 300 crore. The Government is a hundred per cent stakeholder in the four companies presently.

The sources said increase in the paid-up capital would entail changes in the Articles of Association and the Memorandum of Association. The Government had in the past suggested that non-life insurance companies tap the capital markets for capitalisation, without any divestment. This was also because none of the insurance companies are listed companies in the domestic stock markets. Other routes that have been suggested included permitting cross holdings between insurance companies and banking sector to reinforce the existing bancassurance arrangements.

In addition, the sources said, non-life insurers were also expected to pave the way for insurers switching over to a three-tiered structure from the current four-tiered structure. This would entail reduction in the number of offices and delayering of claims settlements.

The sources said that the capitalisation was required to expand business. In fact, bancassuramce was expected to push up the business growth closer to the industry average of about 16 per cent. However, business expansion also implied the need for higher solvency requirements. This was because business acquisition resulted in an increase in insurable liabilities. According to current guidelines prescribed by the Insurance Regulatory and Development Authority (IRDA), insurers are expected to have a solvency ratio of at least 150 per cent. This implied that the capital and the value of assets would have to be at least 150 per cent more than the net insured liabilities. The netting is after taking into account the business ceded to the reinsurers.

The sources said that in addition to sustaining the current business growth, the capitalisation was also required to offset the depreciation of some of their assets. This was especially Government securities, where the bulk of their investible corpus was parked. With yields on the ascent, the values in the holdings of G-Secs and corporate debt have depreciated impairing the capital.

The sources said that insurers were also now unwilling to liquidate more of their equity holdings, despite the high profits that could be earned. This was on account of the high acquisition costs. Besides, the companies prefer holding to the equities as hidden reserves.