The Hindu Business Line : Govt to beef up capital of non-life insurance cos

With financial inclusion becoming the buzzword, the Government has begun working out new methods for beefing up the capital of the public sector non-life insurance companies.

Top Finance Ministry officials said, "Various options are in the melting pot." But they declined to specify the option that the Ministry had zeroed in on. But some options under consideration include direct support by the Government either through equity or open-ended debt (preference shares/perpetual bonds).

Alternatively, the proposal is to allow the insurers to directly tap the domestic equity markets for resources. The latter option has been long pending, in view of opposition from the Left supporters of the UPA, who are opposed to any equity dilution in the PSU insurance companies.

Rural foray

The capitalisation is required to allow the insurance companies to further expand their liabilities, particularly for rural foray. The rural liability covers include medical, credit and property. So far, insurance coverage of rural risks is restricted only to mandated social sector coverage.

Of late, some insurers have begun providing coverage against rural credit risks arising out of natural calamities and crop failures. This is mainly to support banks against potential NPA risks and also provide succour to borrowers. Some of these farm covers are being provided through the crop insurance programme of the Government along with the Agricultural Insurance Corporation of India.

However, industry sources said for large-scale expansion into rural areas and improving the insurance penetration, more capital was required. This is especially in an environment, when risk pricing becomes market determined.

Non-life insurance penetration in the country is only about 0.6 per cent of the gross domestic product against the Asian average of 2 per cent, according to the Sigma report of Swiss Re.

At present, the capitalisation of the four public sector insurance companies is about Rs 11,500 crore ($2.5 billion). But this is unlikely to be sufficient, if the growth in business is to be accelerated, the sources said.

Most of the capital accretions to the insurers, in the past, have come from treasury operations and virtually none from Government support, unlike in the case of the banks.

In fact, despite the absence of Government support, if the insurers have been able to operate within the prescribed solvency margins of 150 per cent (capital plus value of assets over the insured liabilities), the sources said, it was largely on account of cross border reinsurance support, both through treaties and facultative/excess of loss support.

But increasing reliance on cross border reinsurance is leading to high premium outflows by way of ceding of liabilities to reinsurance. This ceding also has another negative fallout.

The sources said that ceding reduces the capital available for investment by insurers within the country, particularly when infrastructure requires large resources. Besides, it also reduces the funds available for investment in the domestic financial markets, including Government securities.

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