A higher foreign investment limit is “credit positive” for India’s insurers as it will bring in fresh capital to strengthen their financials and growth prospects, Moody’s Investors Service has said.
These improvements are key to boosting insurance usage in India, where insurance penetration has remained low amid uneven business growth in recent years, the global rating agency said in a report.
Of the country’s 46 private insurers, 31 have foreign ownership at the 26 per cent threshold or close to it, placing them in the group that will immediately benefit from the lifting of the foreign investment cap, Moody’s said.
In addition to the immediate prospects for capital strengthening, Moody’s also expects broader and deeper foreign participation to strengthen the insurers’ underwriting practices and product innovation. This would particularly benefit the health insurance sector, where there is strong demand for healthcare products.
The healthcare business has become the industry’s major growth driver and now accounts for around 22 per cent of total premiums in India.
On December 26, President Pranab Mukherjee signed an ordinance to raise the foreign investment limit in the insurance sector to 49 per cent from 26 per cent. The ordinance is expected to be replaced with a law in 2015.
The foreign investment limit hike will particularly benefit non-life insurers, which are weighed down by their relatively pressured capitalisation and poor underwriting performance. They are likely to see stronger improvement in their credit profiles from increased foreign investment.
The financial performance of non-life insurers has worsened in recent years on intense competition following the 2007 de-tarrification (by insurance regulator IRDAI), which led to broad underwriting losses.
As a result, the sector’s ability to generate internal capital has been undermined. Increased foreign investment would alleviate the current capital pressure and add to their buffers against potential investment losses from the volatile capital markets, says Moody’s.
Their widened access to foreign capital would also allow them to lower their dependence on domestic funds, it said.