The combo—premium growth and better underwriting discipline by public sector players—will ease the profitability pressure in life and general insurance sectors, said Moody's Investors Service (Moody's), in a report.
According to Moody's, the pressure on profitability of Indian insurers is due to rising claims and reinsurance costs.
In a report, Moody's said the Indian insurance industry's growth prospects are favourable, underpinned by an expected 7% expansion of gross domestic product (GDP) in FY20-22 following growth of 8.7% the previous year.
"Premiums rose 26% in the first eight months of 2022, compared with 10% in FY20-21. General insurance premiums rose 16%, while life new business premiums were up 34%, partly reflecting improvements in disposable income," Moody's said.
Demand for health and protection products is strong, and gradual price increases are also contributing to premium growth, supporting profitability.
In line with global trends, Indian general insurers' claim expenses have risen in recent months due to inflation and a return to normal claims volumes after a pandemic-related decline, whilst COVID-related claims continued for life insurers, Moody's said.
As such, total claims rose 26% in FY20-21, contributing to a 61% decline in profit after tax for the year.
The State-owned general insurers accounted for 64% of the general insurance market's underwriting losses in FY20-21, while their share of total premiums was just 34%. This marks an improvement from FY16-17, when they accounted for 84% of underwriting losses and 46% of total premiums, Moody's said.
Moody's expects claims increases to moderate in the next one to three years as government reforms encourage state-owned insurers to become selective in the risks they cover and so pave the way for price increases across the market, supporting profitability.
According to Moody's, as the reforms take effect, state-owned players' will likely raise their prices to a level commensurate with the risk they take on.
"We expect this to pave the way for stronger price increases across the market as a whole, improving the industry's underwriting performance and profitability, as well as its internal capital generation," Moody's said.
A continued increase in the cost of reinsurance will also encourage Indian primary insurers to raise their prices. At the same time, digitalisation will reduce the sector's acquisition and administrative expenses, supporting profitability.
The credit rating agency said favourable growth prospects encourage capital raising by the industry players.
Moody's said, in FY20-21, the sector's paid capital rose to US$9.7bn (billion) from US$8.1bn a year earlier, an increase of 20%.
In FY20-21, 19 of the country's 34 private general insurers and seven of the 24 life insurers raised capital. More such transactions, as well as more merger and acquisition (M&A) deals and initial public offerings (IPOs), to improve the Indian insurance sector's capital adequacy and financial flexibility in the months ahead are expected, Moody's said.
Moody's said it expeccts foreign insurers to continue investing in the Indian insurance market. Many foreign companies already present in the country through joint ventures could seek to increase their ownership stakes in their Indian affiliates.
The raising of limits on foreign ownership of insurance companies to 74% has been credit positive for the market.
"India's privately-owned insurers, where foreign shareholdings are concentrated, have cut their exposure to high risk assets and have been early adopters of actuarial-led reserve management and risk-based capital management. This has and will continue to help private insurers benefit from India's economic growth," Moody's said.
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