Prospective insurers may need higher capital base

Last Updated: Thu, Apr 21, 2011 20:11 hrs

Aspiring entrants to the insurance industry would now be required to start their ventures with a higher initial capital base than the prescribed level of Rs 100 crore.

At least two insurance companies that are expected to secure approvals for starting operations in the current financial year have increased their initial capital base to Rs 200-500 crore, after the Insurance Regulatory Development Authority’s (Irda) advised them do to so.

“Initially, we were considering starting the venture with Rs 100 crore, which is the minimum capital required. However, after analysing our business plans, Irda advised us to increase this to Rs 200 crore. So, we pumped in more than Rs 200 crore,” said an official of a financial company, which had already announced its plan to foray into the general insurance business.

Another official at a financial services company which plans to enter the life insurance business, said the company had raised the initial capital base to Rs 500 crore after consultations with the regulator.

According to the industry sources, though the regulator cannot force companies to bring in more capital, it can prescribe it, whenever required.

An Irda official said though the minimum capital required to start an insurance business is Rs 100 crore, the regulator prescribed the capital requirement based on the business plan of a company. “We have no intention to change the minimum capital requirement. However, if a company plans to expand very fast, then Rs 100 crore is obviously not enough. We also access the promoter’s financial health and then prescribe a capital level which, we feel, would be required to meet the solvency norms,” he said, adding if a company started a business with more capital, it gave additional comfort to customers.

“With the changes in regulations, margins have taken a hit. Hence, it is quite logical for the regulator to ask aspiring players to pump in more money,” said an industry expert.

The changes in regulations for unit-linked plans had resulted in the industry coming under pressure on profitability, both for life as well as non-life insurance companies.

Since September 2010, when the new norms for unit-linked plans were introduced, sales across the life insurance industry had taken a hit. In most cases, policy sales declined by 25-40 per cent.

According to industry experts, the new norms may also exert pressure on most companies recording underwriting profits in the life insurance industry.

The non-life insurance industry had reported underwriting losses in motor and health portfolios, which account for more than 65 per cent of the industry. While the loss ratio for motor insurance was estimated at 150 per cent, for health plans, the loss ratio stood at 120-130 per cent.

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