Indian insurance companies will need to save capital even with the growth potential since tools for conserving capital are not available to them, says prefessional servives firm Ernst & Young.
Speaking to ET, Ernst & Young partner Rohan Sachdev said different in the West, Indian insurance companies do not have any capital pull reduction tools such as securitisation or reinsurance of their collection. This would mean that companies have to every time provided more capital.
Mr Sachdeva said some mid-sized companies are using up nearly Rs 40 crore to Rs 60 crore a month as a few of their business models are not sustainable under the new regulatory rule and would need to be reworked. He pointed out that in capital efficiency; life insurers promoted by banks have done very well by increasing their operations with minimal staff. For new companies without their own sharing network, it was important that they have a variable distribution cost to keep expenses under check, he said.
In the last decade since the industry was opened up, promoters of life insurance companies have invested in surplus of Rs 27,000 crore into life insurance businesses. The force to get more efficient on capital will also come from new revelation norms that come into effect from July 2010.
Until now, insurance companies have been able to explain their high capital spending saying the funds require to meet the solvency norms. Insurers will be required to provide economic capital, which will provide a break-up of the capital that is required for different business and the extent of capital that they will lose under various scenarios.
According to Mr Sachdev, there are several stress points for the existing business plans of life insurance companies. “Most of the profit drivers for companies will not be there. Some companies have made important lapsation profits which cannot continue once surrender charges are capped.”
Earlier, the insurance regulator had capped all charges, including fund management charges that could be forced by insurance companies on their policyholder’s funds.
Mr Sachdev said he expects life insurance companies to continue to issue unit linked insurance plans but the share of Ulips would decline. He pointed out that the life insurance industry had centred their entire business around Ulips although the Indian markets were not older enough. At present, the life insurance penetration in India is close to 4%.
“The level of maturity can be gauged from the level of diffusion of other personal lines of insurance such as health and householder insurance, which is quite low in India,” he said.
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