Synopsis
The life insurance sector is set for a significant transformation with the proposed increase in FDI limits to 100 percent. This change is expected to enhance capital inflow, enabling insurers to expand mortality coverage and address the protection gap, according to ICRA's recent report.Key Takeaways
- FDI limits raised to 100 percent to boost capital.
- Private insurers report a 41% YoY increase in retail sum assured.
- Shift in product mix pressures VNB margins.
- Higher sum assured leads to increased capital requirements.
- LIC remains dominant, but private insurers lead in sum assured.
New Delhi, Feb 19 (NationPress) The life insurance sector demands significant investments due to its high capital intensity. The proposed increase in FDI limits to 100 per cent is anticipated to inject much-needed capital into the industry, allowing insurers to broaden their mortality coverage and enhance market penetration, as highlighted in a report by the rating agency ICRA released on Wednesday.
ICRA forecasts that the growth in sum assured within the retail segment will continue to surpass the growth in retail new business premiums (NBP).
Private insurers experienced a remarkable 41 per cent year-on-year surge in retail sum assured during 9M FY2025 (compared to a 30 per cent increase in FY2024), significantly outpacing the 17 per cent growth in retail NBP (which was 7 per cent in FY2024).
The shift from high value of new business (VNB) margin non-participating (non-par) products to lower margin unit-linked investment plans (ULIPs) is expected to keep pressure on VNB margins. This will likely lead to increased sum assured and rider attachments to mitigate the adverse effects of this product mix change, according to the report.
As capital requirements for life insurers are directly linked to the sum assured in force, a higher growth in sum assured means that the capital intensity for further growth will remain elevated, leading to increased capital demands for the sector. The suggested rise in foreign direct investment (FDI) limits to 100 per cent is poised to strengthen the capital inflow to the industry and help close the protection gap in India, according to the report.
Historically, life insurance premium growth has been influenced by investment motives, but with rising consumer awareness, there has been a noticeable increase in demand for mortality risk coverage. While the Life Insurance Corporation (LIC) maintains a dominant position in the market, boasting a substantial share of retail and group NBP, private insurers lead in terms of sum assured, the report elaborates.
In 9M FY2025, private players held an 84 per cent market share in retail sum assured and 80 per cent in group sum assured, showcasing a stronger position compared to their 63 per cent and 28 per cent shares in retail NBP and group NBP, respectively.
According to ICRA Vice President Neha Parikh, "Mortality protection requires significant upfront capital, efficient risk management, and reinsurance partnerships, leading to a concentration within the sum assured market. The capital demands are even greater in the retail segment, as the risks are underwritten for extended periods. Some major private insurers have advantages from their long operational history, which contributes to their capacity to underwrite higher sum assured amounts."
