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Rediff.com  » Business » Life may get tougher for pvt insurers

Life may get tougher for pvt insurers

January 03, 2006 14:17 IST

Some private life insurance companies can be hard-pressed for capital to keep pace with business growth. An annual growth of 15-20 per cent has been projected for insurance.

None of the new life insurance companies has broken even so far. Therefore, capital cannot raised from profits. Raising money from the capital markets is also ruled out for the same reason as a track record of profitability is needed.

"Some, especially the domestic partners in sectors other than the financial may have miscalculated the extent of the (capital) requirement," Deepak Satwalekar, managing director of HDFC Standard Life, said.

Life insurance companies need sufficient capital to provide for long-term liabilities in terms of insurance coverage they promise.

Life insurers injected Rs 1,109 crore (Rs 11.09 billion) into the sector 2004-05, hiking their capital by 34.2 per cent to Rs 4352.81 crore (Rs 43.53 billion) in March 2005. The pace has not abated.

Since March, seven insurers have already pumped in Rs 661 crore (Rs 6.61 billion) and two more players, Aviva and IFFCO-Tokio, plan to inject Rs 200 crore (Rs 2 billion) in the next couple of months.

How deep the problem gets will largely depend on how soon the government delivers on its promise to hike the cap on foreign ownership to 49 per cent, from the current 26 per cent.

Of the 14 life insurers, all except Life Insurance Corporation, Sahara and Reliance are joint ventures, with foreign partners owning 26 per cent stake in each.

For many players, the need for increased capital in insurance has come when they need capital to meet the growing demands of their core businesses. At the same time, the need to put in more capital is not a hindrance for financially strong joint ventures.

"We are keen to enter this fast growing market and do not expect the FDI cap to impact our entry plans. Our joint venture with the Bharti group is expected to invest over Rs 300-500 crore (Rs 3-5 billion) over the first three to four years of operations," says Tim Thomas, AXA Business Services' chief representative in India.

This reflects the company's expectation that private insurers will continue to outgrow the industry as a whole and gain a market share of 45-50 per cent over the next 5 years.

Capital is not an issue in the general insurance industry, in which, unlike the retail business, corporate products are covered by re-insurance. Therefore, the general insurer's risk retention capacity and its line of business will determine how much capital will be needed.

Another factor that makes capital an important issue is the fact that foreign players have entered the market with an understanding that the foreign equity limit will be raised to 49 per cent.

They will be keen to bring in global expertise and resources and run the business with higher stakes than the 26 per cent permissible at present.
Ashish Aggarwal in New Delhi
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