Date:26/05/2006 URL: http://www.thehindubusinessline.com/2006/05/26/stories/2006052602960600.htm

Back Private insurers may face capital crunch

C. Shivkumar

RBI clampdown on borrowings from OCBs to hit them hard

Tough times
Life insurers diversifying into traditional products too.
Non-life players need more funds as IRDA wants greater retention of business.
Capital infusion necessary to sustain growth, improve penetration.

Bangalore , May 25

Capitalisation of private sector insurance companies is likely to face difficulties in view of the Reserve Bank of India's clampdown on borrowings from overseas corporate bodies (OCBs).

On May 12, the RBI had notified corporates that OCBs were not recognised lenders. For insurers this had come as a blow. This was especially since many of the foreign partners have used the ECB route for meeting the capitalisation requirements of their domestic joint ventures both in life and non-life insurance sectors.

Sources said that many of them used the route to capitalise by using a warehousing mechanism. This mechanism implied that the foreign joint venture partner advanced ECB to the domestic partner. The domestic partner in turn used the funds to raise the equity as its share in the insurance company to conform to the IRDA (Insurance Regulatory and Development Authority) specified solvency margin of 150 per cent.

In fact, the warehousing method was preferred since some of the domestic joint venture partners lacked the resources to meet the capitalisation requirements for sustaining the high growth and the solvency margins. The sources said that the foreign joint venture partners had used ECB route in view of the current guidelines restricting their equity holdings in domestic joint ventures to 26 per cent and providing domestic companies the majority holding of 74 per cent. The warehousing mechanism also allowed the domestic companies to transfer their stakes when the insurance statutes are amended allowing for raising the foreign holding.

The sources said the equity warehousing mechanism was increasingly used by life insurance companies. This was because many of them were diversifying their presence into traditional products as well instead of only unit-linked policies or pure risk covers. Besides, they are also beginning to focus on group and pension driven businesses that require large capitalisation.

Escalating capital needs

However, non-life insurers appetite for capital has escalated during the last few months in view of the IRDA insisting on greater retention of business in the country. So far non-life insurers have contained their capital requirements by resorting to reinsurance arrangements. This meant ceding their liabilities to a global reinsurer for a commission. Effectively this also meant an outflow of premium from the country. Concerned over such high outflows, the sources said, IRDA has already conveyed that such large premium outflows from the country was not acceptable. It is precisely for this reason that capital would be required. Moreover, capital infusion was necessary to sustain the high growth rates and at the same time raise the insurance penetration to global levels.