In a positive development for insurance sector, global credit rating agency Moody`s Investor Service (MIS) underscored that increase in foreign direct investment (FDI) limit by 23% to 49% in the sector is expected to alleviate the capital pressure on Indian private non-life insurers. According to the rating agency, the widened access to foreign capital would also insurance to lower their dependence on domestic funds.
The financial performance of non-life insurers has worsened in recent years in the face of intense competition even since de-tariffication took place in 2007, which led to broad underwriting losses. As a result, the sector`s ability to generate internal capital has been undermined thereafter.
In a cause of concern for the industry, while, the combined ratio (incurred losses + operating expenses as a percentage of premium) of private non-life insurers was high, between 117.7% and 106.4% over the past five fiscal years, its average solvency margin ratios fell to 200 percent as of the end of September 2014 from 275 percent as of the end of March 2013, versus the regulatory requirement of 150%.
The government, back in December, approved promulgation of an ordinance to hike Foreign Direct Investment (FDI) cap in the insurance sector to 49% from 26%. It then highlighted that the proposed hike in foreign investment limit to 49% in the insurance sector has potential to attract up to $7-8 billion from overseas investors, giving a major boost to the segment.
