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N.S. Vageesh

CHENNAI, March 20

THE recent move by the Finance Ministry to clear the decks for a hike in foreign direct investment limit in the insurance sector to 49 per cent from the existing 26 per cent must come as a welcome breather for a number of private life insurance companies

A dozen private companies are in the life insurance business after they were flagged off in late 2000. The IRDA had fixed the entry norm for initial capital at Rs 100 crore. Most companies brought in between Rs 125 crore and Rs 150 crore as their initial capital — shared in the 74:26% ratio for domestic capital and foreign investment.

Everyone made it clear that they did not expect to break even before at least six years from the date of inception. In the meanwhile, foreign partners have lobbied intensely for a hike in their stake. Some also have a "friendly understanding" with the domestic partner to enable a smooth transition to a higher stake when regulations permit it.

For the last few months, a number of private insurance companies have been infusing fresh capital. As the insurance business grew over the past year, the initial capital has been absorbed quickly. HDFC Standard Life, which began business with around Rs 166 crore has increased its capital base by Rs 218 crore recently. Aviva hiked its capital by Rs 45 crore to Rs 155 crore in mid- January 2003, while Birla Sun Life Insurance Company, which began with Rs 119 crore increased its base twice during 2002 to take its capital base to Rs 180 crore. Max New York Life, which began with Rs 105 crore had hiked its capital to Rs 250 crore last year and had announced that it would raise it further to Rs 300 crore before the end of March 2003. Metlife, which started with Rs 110 crore, has said it would infuse around Rs 75 crore this year. Similarly, ICICI Prudential Life Insurance Company, which began with around Rs 150 crore in December 2000 has since hiked its capital six times to take its capital base to Rs 375 crore.

An ICICI Prudential spokesperson explained the need for increase in capital thus: "New life insurance companies incur significant costs in setting up infrastructure. In addition they have to provide for reserving for potential payouts and for solvency margin. The costs are also front-ended in the form of issuance as well as higher first year commissions. As a result the life insurance company starts making money on a policy only after a few years. This results in initial losses, but translate into high cash flows once the company breaks-even. The frequent capital inflows in the initial years of the business are for these reasons; and the faster a company grows in the early years, the more capital must be infused to sustain this growth."

Acturial experts have also speculated that some companies are pumping in extra money to compensate for lower premium rates. They say severe competition and the need to capture market share has forced companies to tread on the brink of a very delicate line on prudential practices.

More money is needed for survival as a number of companies have projected their future capital in the region of around Rs 500 crore to Rs 700 crore. Cabinet and parliamentary approval will therefore facilitate the inflow of further foreign capital. It will also signal the shift in power and control to foreign partners formally.

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