Life insurance sector to get booster shot with FDI limit at 100 per cent

New Delhi, Feb 20: While the high capital intensity of the life insurance sector necessitates substantial investments to sustain growth, the increase in FDI limits will provide the much-needed capital boost to the sector, enabling insurers to expand their mortality coverage and increase penetration, according to a report released by rating agency ICRA on Wednesday.

ICRA expects growth in sum assured in the retail segment for insurers to continue to outpace the growth in retail new business premiums (NBP). Private insurers saw a surge in retail sum assured by 41 per cent YoY in 9M FY2025 (30 per cent in FY2024), higher than the retail NBP growth of 17 per cent (7 per cent in FY2024). Given the shift in product mix from the high value of new business (VNB) margin non-participating (non-par) products to low VNB margin unit-linked investment plan (ULIP) products, the pressure on the VNB margins is likely to continue, resulting in increased sum assured and rider attachments in a bid to offset the negative impact of the product shift, the report states. As the capital requirements for life insurers are also a function of the sum assured in force, with higher growth in sum assured, the capital intensity for incremental growth is expected to remain high, resulting in elevated incremental capital requirements for the sector.

The recently proposed increase in the foreign direct investment (FDI) limits to 100 per cent could boost the inflow of capital to the sector and reduce the protection gap in India, the report states. While historically, the growth in life insurance premiums has been driven by investment considerations, with increased consumer awareness, the industry has seen an uptick in demand for the coverage of mortality risks. While the Life Insurance Corporation (LIC) continues to dominate the market with a substantial share in retail and group NBP, however, private insurers lead in terms of sum assured, the report further states.

With a market share of 84 per cent in terms of retail sum assured and 80 per cent in terms of group sum assured in 9M FY2025, private players have a relatively higher share when compared to their market share of 63 per cent and 28 per cent in terms of retail NBP and group NBP, respectively. ICRA Vice President Neha Parikh said: “Mortality protection demands significant upfront capital, risk management and reinsurance tie-ups, resulting in concentration of the sum assured market. Within the retail and group sum assured, the capital requirement is even higher in the retail segment, given that the risk is underwritten for a much longer tenor. Some large private insurers benefit from their long operating history, resulting in backbook surplus, hence, partly supporting their ability to underwrite a higher sum assured.”