The Hindu Business Line : Amended Insurance Bill to be booster to private players

The scenario
All the PSU insurers currently enjoy solvency ratios well above the Required Solvency Margin.
Private non-life insurers have complied with the RSM, through recourse to cross-border reinsurance companies.
Capital requirements are huge to sustain operations; global insurers float bonds for supplementing capital needs.

C. Shivkumar

Bangalore, Jan. 9 The private sector insurance companies are likely to be the first ones off the block to take advantage of the government’s move to amend the capital structure.

The Insurance Laws Amendment Bill, now placed in the Rajya Sabha, has proposed amending Section 6A of the Insurance Act of 1938.

The amendment would allow insurance companies to raise capital on the lines of the banking sector in the form of subordinated debt or through preference shares or through perpetual bonds.

Global insurers float bonds for supplementing their capital requirements.

Sources said that the Bill was most likely to be passed in the next session of Parliament, since both the ruling and the major opposition BJP supported the reforms.

For the public sector insurers, capital is currently not an issue.

This was because almost all the PSU insurers, both general and life, currently enjoy solvency ratios well above the Required Solvency Margin (RSM) of 1.5 times. Solvency margin is the excess of capital and value of assets over the insured liabilities.

Currently, the public sector solvency ratios are well over two times on the basis of a book value-based asset valuation.

In the event of a migration to a marked-to-market based valuation methodology or even a partial MTM regime as in the case of the banking sector, insurers’ solvency ratios would show a quantum jump, the sources said.

Capital needs

The shortage of capital was mostly in the private sector, the sources said, since the partners are currently strapped for cash with the slowdown in the domestic economy and a looming global recession.

IDBI Fortis Life Insurance Company Ltd Chief Investment Officer, Mr Aneesh Srivastava, admitted, “Capital requirements are huge to sustain operations. Getting pure equity is difficult since insurance is a long gestation business. Hybrid capital is probably one way out.”

So far, private sector non-life insurers have complied with the RSM, through recourse to cross-border reinsurance companies.

At least 55 to 60 per cent of non-life business was ceded to reinsurers. This financial year and even the next year, global reinsurance is likely to remain tight after severe investment losses.

Hybrid instruments

Reinsurance premiums are currently about 0.5 per cent to 0.7 per cent of the sum assured, close to the levels prevailing post 9/11. Hybrid instruments are, therefore, likely to help in such an adverse environment.

Bharati Axa General Insurance Company Ltd, Chief Executive Officer, Mr Milind Chalisgaonkar, said, “Hybrid instruments are a good option; give flexibility to companies. But whether the instruments are used for meeting solvency or for capital requirements is an individual company decision.”

For life insurers ULIP fatigue is already beginning to set in. Insurers said that premium payment lapses in ULIPs were on the increase with volatile equity markets. Life insurers, therefore, were beginning to shift to traditional assured products that are now emerging as the flavour of the season.

Tackling pressures

Besides, in the current environment, migration to an MTM regime is likely to create capital stress for the private sector in view of pressure on the RSM. This was because private sector asset acquisitions took place around 2004-05. Consequently, book value of equity assets was higher than the current market value.

Only the government security assets have appreciated in value, during the last six months. Capital requirements, therefore, remained high. This pressure was also for sustaining the current pace of growth and preserving market share. Life insurance grew by 31 per cent on a year-on-year basis for the first 8 months and non-life by 15 per cent.