The Hindu Business Line : Private insurers nudge for higher FDI cap

Budget wish-list
Need felt by life insurers since their new growth segments are mostly from rural and semi urban regions
In the case of non-life insurance companies, it is required for improving the retention capacities within the country

Bangalore , Jan. 5

Private sector insurers have pitched for raising the foreign direct investment (FDI) cap in the insurance sector from the current level of 26 per cent as part of their Budget wish-list.

Some of the large insurance companies have indicated that they are prepared to bring in the funds for capitalising their joint ventures to sustain the growth momentum.

Sources said the insurance regulator was not opposed to any recapitalisation of the life insurance or the non-life insurance ventures in the country. But the opposition to hike in FDI cap is entirely from the Left Unions. The sources said that they would need to capitalise the insurance companies for meeting the stringent solvency norms prescribed by the Insurance Regulatory and Development Authority (IRDA).

IRDA norms

IRDA guidelines prescribe a solvency margin of 150 per cent. This implies that the capital and value of the assets of insurance companies be at least 1.5 times more than the insured liabilities.

MetLife India's Director-Marketing Mr Gaurav Suri said, "Capitalisation is not an issue. MetLife is prepared to bring in the capital if the cap is lifted."

The need for lifting the cap was felt more by life insurers. This is particularly because the new growth segments for life insurers are mostly from the rural and semi urban regions of the country. In these regions, the preference is for traditional savings linked products with guaranteed maturity value. In the metros and class one cities, the preference, however, is for unit-linked covers, where the investors are prepared to take risk on the returns. Consequently the unit-linked products are capital efficient.

ING Vysya Life Insurance Company's Managing Director and Chief Executive Officer Mr Kshitij Jain said, "Our parents are prepared to bring in the capital if the Government relents on the FDI cap." This will help improve insurance penetration into hitherto underinsured regions, he added.

Penetration level

Yet despite the capital constraints, life insurers have been growing at over 150 per cent on a year-on-year basis. However, despite this growth momentum, insurance penetration is still well below global average. Life insurance penetration is below one per cent of the gross domestic product as against the Asian average of 2 per cent and the global figure of 3.18 per cent.

In the case of non-life insurance companies, the need for higher capitalisation is required for improving the retention capacities within the country. The sources said that with the low capitalisation of private sector insurers and the public sector not allowed to raise capital from the financial markets, there was a shortage of domestic insurance capacity.

Capacity shortage

Faced with this shortage, most of the insurers are reliant on external reinsurance support, through cession of liabilities.

The cession, they said, was leading to an outflow of foreign exchange and investible capital from the country. The ceding ratio (percentage of insurance ceded to reinsurance companies including cross border entities) is currently about 31 per cent. In the private sector, where the capitalisation is barely 10 per cent of the PSUs, the ceding ratios are close to 75 per cent.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
India, Italy see scope to expand trade

Weather trigger for sustained crude spiral ruled out

UTI to launch overseas fund by March-end

Hutchison, Essar differ over right of refusal

Inflation up on costlier food, manufactured items

Private insurers nudge for higher FDI cap

MFs ceiling for overseas investment raised to $3b

Plan to raise oil storage capacity by 5 mt

Steel cos told to publish price lists

Broadcasters not keen to slash ad rates with CAS rollout

GM plans engine, gearbox plant

Bajaj Electricals looking at buys

Jewellery firms eye Japan

LIC to unlock real estate value

`Notebook market set for accelerated growth'

Corporate bonds: Costlier for companies?

West Coast Paper in spotlight