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The Reserve Bank of India (RBI) has expressed concern on the rising third-party motor pool losses in the non-life insurance sector, as this may hurt the stability of banks, which have substantial exposure to the sector.

This assumes importance, as the Insurance Regulatory and Development Authority (Irda) had recently said it may increase the provisioning requirement for the third-party commercial motor portfolio of general insurance companies from 153 per cent to 175-205 per cent. If implemented, the industry may need additional capital of Rs 3,500-6,000 crore, which may impact banks that have general insurance subsidiaries.

Currently, State Bank of India, ICICI Bank and HFDC Ltd are the major lenders who have general insurance subsidiaries.

“The Indian insurance sector is well-capitalised, as the solvency ratio exceeds the regulatory requirements in all the cases, with respect to life insurers. Recently, however, this has become a matter of concern for non-life insurers, as the liability requirement and the associated capital requirement for the mandatory third-party motor pool has increased, and so have underwriting losses in the non-life sector,” RBI said in the half-yearly Financial Stability Report released on Thursday.

“Inter-linkages between insurance and the banking sector are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding the bank in the conglomerate may have an amplifying effect on the insurer,” RBI said. Most insurers in India have a foreign partner with 26 per cent stake, the maximum permissible foreign direct investment limit in the sector.

Source By Business Standard

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