The Hindu Business Line : FDI in insurance may be hiked to 49 pc

THE Union Government is expected to finally raise the cap on foreign direct investment to 49 per cent for private sector insurance players in the country.

High-level sources said that this measure was expected to be announced in the Union Budget for 2006-07 by the Union Finance Minister as part of a comprehensive package for taking forward the reforms in the domestic insurance industry - both life and non-life.

At present, foreign equity stake in the insurance companies is capped at 26 per cent. Foreign joint venture (JV) partners have consistently been asking for raising the ceiling beyond this level. Sources said that the Insurance Regulatory and Development Authority (IRDA) was not opposed to an increase in the FDI ceiling to allow the domestic players to recapitalise. The feeling was that insurers would be required to recapitalise to comply with solvency requirements of 150 per cent prescribed by IRDA. Already the foreign partners have been bringing in capital through indirect means to comply with IRDA guidelines. The favoured method was through warehousing of the foreign equity with the domestic joint venture partners. However, this was now becoming difficult, the sources said. This was because, the method used involved extending external commercial borrowings to the domestic JV partners. Besides, some of the domestic JV partners were wary of having more debt on their respective balance sheets.

The sources said that almost all the domestic non-life and life insurers now required additional capital for sustaining their respective growth.

Life insurance business has been growing at a much faster pace of as much as 46 per cent for the first nine months of the current fiscal. This high average, however, was largely driven by unit linked policy growth that is treated as capital efficient, since the investment risks were on the policyholders. But private sector players are also beginning to look at the savings-linked and pure risk policies for powering their rural forays that tend to be capital-intensive.

Non-life insurance business capital requirements also were high. due to the high to sustain business growth 16.5 per cent. Private sector insurers have been able to sustain the high growth rates by ceding their business to global reinsurers. This has led to large outflows of foreign exchange. In fact, the regulator wants greater retention of business within the country itself.

Besides, the sources said, both life and non-life insurers have suffered depreciation on Government securities, which comprised a large chunk of their portfolios. Ten-year yields over the last one year have depreciated by at least 100 basis points and was poised to dip further in the coming weeks and, consequently, exert stress the solvency ratios, the sources added.

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