Insurance companies may get another opportunity to shore up their capital base through Tier-II capital, while initial public offer (IPO) guidelines for insurers are likely to be out soon.
“After the Insurance Bill is amended, we may allow insurers to raise Tier-II capital. Amendment to Section 6 of the Insurance Act 1938 will give us the opportunity to form rules accordingly,” said a senior Insurance Regulatory and Development Authority (Irda) official.
For insurers, Tier-II capital could include bonds, financial reinsurance and debt against future profit, according to industry experts.
Insurers say the move would lower capital infusion requirements and allow them to expand their business faster without affecting profitability.
“This means we do not have to drawdown from shareholders every time we need capital. Companies would not have to depend on shareholders for funds. Other economies allow insurance companies to raise debt capital before they go public. It will enable companies to grow faster,” said Vibha Padalkar, chief financial officer of HDFC Standard Life.
“It is used in many countries for short-term funding, where you think you will be able to recover the loss. If given an option, companies will raise Tier-II capital,” said Abhijit Gulanikar, CIO of SBI Life.
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The perception is that if insurance companies are into less risky business, the norms for them will be different from those doing risky business, as these companies will require capital based on the kind of business they write. Similarly, single premium is less risky than regular premium and would require less capital.
Discussions on Tier-II capital have started. One of the six committees formed to look into the new norms is working on it.
“Whether insurance companies will raise Tier-II capital will depend on the type of business one writes,” said Future Generali’s Chief Actuary, G N Agarwal.
Experts said newer companies could find it difficult to raise debt capital because of credit rating. At present, companies get only their claim payment rated.
Last week, Irda Chairman J Hari Narayan had said the norms for insurance companies to tap the capital market for funds were awaiting the Securities and Exchange Board of India’s nod and would be out soon.