The Hindu Business Line : Govt, IRDA get tough with foreign insurance cos

Tight norms
CALL FOR stricter norms after US insurer Chubb Corp's exit from JV with HDFC
SCRUTINY INVOLVES ascertaining ability of partners to not breach solvency rules

Bangalore June 1 The Government and the Insurance Regulatory and Development Authority (IRDA) have conveyed that foreign insurance companies who exit from domestic joint ventures midway would not be allowed re-entry.

Highly placed sources said that the Government and the insurance regulator had taken a stern view of US insurer Chubb Corporation's exit from the joint venture with HDFC, HDFC-Chubb General Insurance Company Ltd. The sources said: "We will prefer to have only long term players in the country."

HDFC, the majority stakeholder in the joint venture, recently bought-out the 26 per cent stake of Chubb Corporation in the venture.

The sources said as fallout of the split, applications of joint ventures , both in the general and life segments, are expected to be scrutinised more closely.

At least three public sector banks are preparing to foray into the life and non-life insurance businesses.

The scrutiny would involve ascertaining the ability of the joint venture partners to sustain the operation without breaching the solvency norms, and instability in the insurance markets. Currently, the IRDA's prescribed solvency norm is 150 per cent.

Regulations

This guideline prescribes that the value of the assets and capital of the insurance joint ventures would have to be at least 1.5 times more than the insured liabilities.

Consequently, in the event of any shortfall in solvency norms, the partners would have to bring in the capital for complying with the guidelines, they added.

But the monitoring is likely to be become even stiffer than it is currently, since domestic insurance standards are expected to shift to Solvency II standards prescribed by the International Association of Insurance Supervisors.

Life insurance companies have already migrated to quarterly solvency norms, effective this financial year.

The insurance industry itself appeared pleased with the Government/regulatory stance. The Optima Risk Management Services' Chief Executive Officer, Mr Rahul Agarwal, said: "Such interventions will eliminate instability and feeling of negativity among the policy holders towards private sector insurance companies."

The parting between the joint venture partners comes at a time when the regulator is stepping up the pace of insurance sector reforms.

Beginning this calendar year, market forces were given a free play in risk pricing. Besides, third party motor insurance businesses have also been converted into a separate pool, effective from this fiscal year, to cut industry losses. The reforms are now setting the insurance industry on a roll, the sources added. Moreover, the insurance penetration in the country is expected to rise to Asian levels over the next three years, to about 5 per cent of the gross domestic product (GDP).

Combined penetration

Currently, the combined penetration of both life and non-life is less than 2 per cent of the GDP.

The increased penetration was also because of the high GDP growth trajectory of 8 per cent plus and the high insurance sensitivity.

Current estimates are that for every one per cent increase in the GDP, insurance premiums increase by at least 4 per cent.