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Thursday, January 08, 2015

India's Insurers Get Credit-Positive Increase in Foreign Direct Investment Cap

Stella Ng, AVP - Analyst, Financial Institutions Group, Moody's Investors Service Hong Kong 

On 26 December, India President Pranab Mukherjee signed an ordinance approving the Insurance Laws (amendment) bill, which aims to raise the foreign direct investment (FDI) cap in the insurance sector to 49% from 26%. With the government's approval, this ordinance is now pending passage from the parliament in 2015. 

The higher FDI limit is credit positive for India's insurers because it will bring in fresh capital to strengthen their financial standing and growth prospects. These improvements are key to boosting insurance usage in India, where insurance penetration has remained low amid uneven business growth in recent years (see Exhibit 1). 

According to Swiss Reinsurance Company Ltd. (financial strength Aa3 stable), India's total insurance penetration (premiums as a percentage of GDP) fell to 3.9% in 2013 from 5.2% in 2009, versus total penetration of 5.5% in Thailand and 4.8% Malaysia in 2013. This implies considerable room for future growth. 

Of the country's 46 private insurers, 31 currently have foreign ownership at the 26% threshold or close to it, placing them in the group that will immediately benefit from the lifting of the FDI cap. On Monday, Bupa Ltd. (unrated), the UK-based global healthcare group whose core insurance subsidiary is Bupa Insurance Ltd. (financial strength A2 stable), announced that it would apply to increase its stake in Max Bupa Health Insurance (unrated) to 49% from 26%. 

In particular, non-life insurers stand to benefit owing to their relatively pressured capitalization and poor underwriting performance. They are likely to see a stronger improvement in their credit profiles from increased foreign investment. Non-life insurers' financial performance has worsened in recent years as intense competition following its 2007 de-tariffication (the Insurance Regulatory and Development Authority of India removed fixed rate restrictions on all insurance products except third-party motor insurance) led to broad underwriting losses. As a result, the sector's ability to generate internal capital has been undermined. Among the private non-life insurers, their combined ratio was high, between 117.7% and 106.4% over the past five fiscal years (see Exhibit 2), and their average solvency margin ratios fell to 200% as of the end of September 2014 from 275% as of the end of March 2013, versus the regulatory requirement of 150%. 

Increased foreign investment would alleviate the current capital pressure on non-life insurers and add to their buffers against potential investment losses from the volatile capital markets. Their widened access to foreign capital would also allow them to lower their dependence on domestic funds. 

In addition to the immediate prospects for capital strengthening, we also expect broader and deeper foreign participation to strengthen the insurers' underwriting practices and product innovation. This would particularly benefit the health insurance sector, where there is strong demand for healthcare products. The healthcare business has become the industry's major growth driver and now accounts for around 22% of total premiums in India.
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