FDI hike in insurance, LIC IPO, privatisation of state-run insurers credit positive: Moody's

Global rating agency Moody's has lauded the government's decision to hike limit on foreign direct investment (FDI) in Indian insurance companies to 74 per cent from existing 49 per cent. The loosening of restrictions on foreign ownership of insurers announced in the Union Budget is credit positive as it will provide new sources of funding. The move will also offer access to external know-how that can support insurers' underwriting performance and unlock new operating efficiencies, it said.

Moody's said that the potential for higher foreign ownership will increase insurers' financial flexibility by offering additional opportunities to bolster solvency. Besides, insurers would also benefit from the sharing of risk management best practices, possibly leading to a lowering of exposure to high-risk assets and adoption of risk-based capital management.  

"We have already seen evidence of the benefits of foreign ownership with India's privately-owned insurers, which have lowered their exposure to high-risk assets and been early adopters of actuarial-led reserve management and risk-based capital management," says Moody's.

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The agency expects similar positives from the IPO of Life Insurance Corporation of India (LIC) - the country's largest life insurer - and privatisation of one of the government-owned general insurers, which would over time strengthen their credit profiles.  

As per Moody's, these changes come at a time when market expects continued increased demand for and awareness of the health and protection business. Adding to it, India's low rate of insurance penetration indicates ample scope for continued premium growth. The overall insurance penetration rate (premiums as a percentage of GDP) stood at 3.8 per cent in 2018, low compared with developed markets such as the UK (10.3 per cent) and the US (11.4 per cent), and still behind large developing markets such as China (4.3 per cent).  

On growth prospects of general insurance in India, the global rating agency said that the penetration rate currently stands at just 0.9 per cent, which indicates there is ample scope. This is less than half the rate for China (2 per cent), which itself lags developed markets such as the US (8.5 per cent).

As growth in insurance premiums is strongly correlated with economic expansion, the agency expects that the announced public spending on infrastructure and healthcare in the budget will be credit positive for the insurance sector. General insurance lines such as construction and worker compensation stand to benefit while higher spending will lead to a rise in demand for personal insurance lines such as motor and life, it added.

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