Consolidation seen in life insurance

A report by an international actuarial and consulting firm has warned that there is a sharp fall in investments by promoters of Indian life insurance companies, some of whom may either sell or close their companies to new business given capital constraints.

Investment by promoters of Indian life insurance companies has been over and over again dropping since the global financial crisis in 2008 although most companies are still to achieve break-even and are still in need of capital. Investments have halved from Rs 8170 crore in '08-09 to Rs 4152 crore in '09-10.

In the current fiscal (April 2010 till date), investment has again been half of the previous financial at Rs 2156 crore.

This reduction off reflects reluctance of promoters to pump in more funds although the industry still requires capital. According to a study by Milliman, an international actuarial firm, the main reasons for this are a general paucity of capital after the global economic downturn along with the careful approach taken by Indian insurers in light of a slowdown in new business volumes, high expense levels, and delayed break-even targets.

"Despite the recent slowdown in growth and capital infusions, we believe that the industry will still need to inject important volumes of capital in order to achieve the full potential that the sector has to offer. When the largest companies are in 1,500 to 2,000 locations, companies with a current footprint of only 200 to 300 branches and a desire to be national players are still looking at a lot of investment requirements," said Sanket Kawatkar, Practice Leader, Life Insurance, India, and Richard Holloway MD, South East Asia and India, in a white paper released on Wednesday.

According to the report, the recent IRDA guidelines capping charges on unit-linked products that were introduced on September 2010 may also have had a significant impact on promoters' desire to invest significant capital into the business in the near future. This is likely to impact the level of capital infusion in the near future until promoters gain greater confidence around the regulatory environment and revise their strategies accordingly.

"Promoters are questioning the merits of diverting available capital away from their core businesses to their life insurance businesses, where the break-even targets may now be further delayed following the recent regulatory developments," the report said.

The industry could get some relief in terms of capital if the foreign direct investment limits are raised or if companies are allowed to raise capital through an initial public offering. However, the regulation in respect of both these routes of capital recruitment has been delayed. The only option left for promoters is to raise capital through the private equity route at the holding company level. However, even in this way there are challenges because promoters value their companies much higher than private equity investors.