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Life insurers bolster capital base to survive

Faced with solvency norms as well as the need for rapid expansion in view of increased competition, India's life insurers are bolstering their capital bases regularly, reports Sanjeev Sinha.

india Updated: Mar 10, 2008 00:16 IST
Sanjeev Sinha

Faced with solvency norms as well as the need for rapid expansion in view of increased competition, India's life insurers are bolstering their capital bases regularly. So much so that in the past two-and-a-half months alone, close to 10 life insurers have either infused capital or announced plans to infuse more than Rs 4,000 cr of equity capital in the near future.

MetLife India Insurance, for instance, has recently increased its paid-up capital to Rs 1,230 crore through an additional capital infusion of Rs 350 crore, while Aviva India has brought in Rs 246.3 crore, taking the total capital base to Rs 1,004.5 cr.

Similarly, Tata AIG Life has infused Rs 100 cr, while Birla Sun Life will be bringing in Rs 100 cr before March, taking its total capital base to Rs 1,100 cr. Max New York Life is also planning to scale up its capital base from Rs 907 cr to Rs 2,600 cr by 2011, and so are other players like SBI Life and ING Vysya Life. Bajaj Allianz Life, which infused about Rs 200 cr just a month ago, is planning to add Rs 300 cr in March, according to its CEO Kamesh Goyal.

Sources say insurers need additional capital basically to fund their expansion as well as growth in new businesses, besides meeting regulatory norms. Aviva, for instance, will use the additional capital to fuel its plans to double its sales force to 66,000, launch 30 new branches, and enhance its portfolio of traditional products.

Max New York Life needs capital to raise the number of its offices from 233 to 533 in 400 cities and to take the strength of insurance advisors from 30,500 to 2 lakh by 2011. "We are infusing capital basically to support our growth plans in India," said Rajesh Relan, MD, MetLife India.

But more than growth plans and expansion, it is the solvency requirement — the insurer's ability to pay claims to policyholders — which makes capital infusion a must. As per the Insurance Regulatory and Development Authority (IRDA) specification, insurers are must maintain a solvency margin of 150 per cent. Moreover, they can use only equity. "The current FDI limit set by the RBI for the insurance sector is 26 per cent. In case of a capital infusion, all joint venture partners bring in capital as per their share-holding pattern. In our case, for instance, Dabur brings in 74 per cent and Aviva 26 per cent," said Vishal Gupta, associate director marketing, Aviva India.

"Insurance is a capital-intensive industry because of high initial costs and typically a company takes 7-8 years or more to break even,” he added.