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C. Shivkumar

Move follows Ministry's objection to their equity float proposal

Bangalore June 14 Public sector insurance companies have reiterated the need for bolstering capital to meet the competition challenge from the private sector.

Sources said that this followed after some objections from the Finance Ministry to their equity float proposals.

PSU insurers have conveyed that their current capitalisation is insufficient for sustaining growth and increasing their penetration levels into the rural markets.

Currently, the combined net worth (equity plus reserves) of all the four PSU insurers (New India Assurance, United India Insurance, National Insurance and Oriental Insurance) is in the region of about Rs 12,000 crore.

In fact, the sources said the buoyancy in equity markets had helped them sustain their business without impacting solvency.

Non-life insurers have used profits from sale of investments to bolster their capital, for expanding their business.

Investment trading

Till last year, they have earned profits averaging about Rs 450 crore each per annum, as the Sensex marched to 14,000 points.

However, the sources said, profits from investment trading were not sustainable and could turn out to be counter productive.

Besides, with capital constraints, PSU insurers have been conceding market share to the private sector.

Pvt market share

Last financial year, private sector's share was expanded to 35 per cent. This situation is increasingly beginning to ring alarm bells among the PSUs. This is despite PSU's expansive presence in the country.

The sources said one of the major factors for the loss of market share was that unlike the private sector, PSUs were obsessed with solvency and maintaining high levels of retention.

Solvency margin

The prescribed solvency margin (the excess of capital and value of assets over the insured liabilities) by the insurance regulator is 150 per cent.

Retention ratio

The private sector insurers have been operating at very low retention ratios of under 50 per cent. Retention ratio implies the amount of premium retained within the country.

Instead most of the private sector insurers were ceding business to foreign reinsurers to maintain solvency and at the same time earning large ceding commissions. Ceding by PSU insurers to foreign insurers was less than 30 per cent, implying retention of 70 per cent.

But reducing retention is an option before the PSUs, if the Government maintains its opposition to the equity raising efforts.

Ceding of liabilities

This implies that PSUs would also consider increasing their ceding of liabilities to maintain solvency. Such a move, the sources said, would have other negative effects by way of reduction in investments within the country, including infrastructure.

PSU non-life insurers are currently among the largest financiers of long-term debt of state governments, domestic equity markets and rural infrastructure.

Moreover the current level of capitalisation is on an insurance penetration of less than one per cent of the Gross Domestic Product. If the penetration is to improve to 2 per cent, the Asian average, there is little alternative to additional infusion, the sources added.

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