The increase in foreign direct investment (FDI) limit by 23% to 49% is expected to alleviate the capital pressure on Indian private non-life insurers, global credit rating agency Moody's Investor Service (MIS) said Thursday.
"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," MIS said in a statement.
Their widened access to foreign capital would also allow them to lower their dependence on domestic funds, MIS added.
According to MIS, Indian private non-life insurers stand to benefit by the government's decision to increase the FDI limit as they are relatively pressured for capital and poor underwriting performance.
"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," MIS said.
As a result, the sector's ability to generate internal capital has been undermined.
According to the rating agency, the combined ratio (incurred losses + operating expenses as percentage of premium) of private non-life insurers was high, between 117.7% and 106.4% over the past five fiscal years.
The rating agency also said the 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%.
