Consolidation seen in life insurance

A report by aninternational actuarial and consulting firmhaswarned that there is a sharp fall in investments by promoters ofIndianlife insurancecompanies, some of whom may either sell orclose their companies to new business given capital constraints.Investment by promoters of Indian life insurance companies has been over and over again droppingsince the global financial crisis in 2008 although most companiesare still to achieve break-even and are still in need of capital.Investments have halved from Rs 8170 crore in ’08-09 to Rs 4152crore in ’09-10. In the current fiscal (April 2010 till date),investment has again been half of the previous financial at Rs 2156crore. This reduction off reflects reluctance of promoters to pumpin 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 afterthe global economic downturn along with the careful approach takenby Indian insurers in light of a slowdown in new business volumes,high expense levels, and delayed break-even targets. “Despite therecent slowdown in growth and capital infusions, we believe thatthe industry will still need to inject important volumes of capitalin order to achieve the full potential that the sector has tooffer. When the largest companies are in 1,500 to 2,000 locations,companies with a current footprint of only 200 to 300 branches anda desire to be national players are still looking at a lot ofinvestment requirements,” said Sanket Kawatkar, Practice Leader,Life Insurance,India, and Richard Holloway MD, South EastAsiaandIndia, in a white paper released on Wednesday. According to thereport, the recent IRDA guidelines capping charges on unit-linkedproducts that were introduced on September 2010 may also have had asignificant impact on promoters’ desire to invest significantcapital into the business in the near future. This is likely toimpact the level of capital infusion in the near future untilpromoters gain greater confidence around the regulatory environmentand revise their strategies accordingly. “Promoters are questioningthe merits of diverting available capital away from their corebusinesses to their lifeinsurance businesses, where the break-even targets may now befurther delayed following the recent regulatory developments,” thereport said. The industry could get some relief in terms of capitalif the foreign direct investment limits are raised or if companiesare allowed to raise capital through an initial public offering.However, the regulation in respect of both these routes of capitalrecruitment has been delayed. The only option left for promoters isto raise capital through the private equity route at the holdingcompany level. However, even in this way there are challengesbecause promoters value their companies much higher than privateequity investors.