"Increased foreign investment would alleviate the current capital pressure on non-life insurers and add to their buffers against potential investment losses from the volatile capital markets," MIS said in a statement.

Their widened access to foreign capital would also allow them to lower their dependence on domestic funds, MIS added.

According to MIS, Indian private non-life insurers stand to benefit by the government's decision to increase the FDI limit as they are relatively pressured for capital and poor underwriting performance.

"Non-life insurers' financial performance has worsened in recent years as intense competition following its 2007 de-tariffication (the Insurance Regulatory and Development Authority of India removed fixed rate restrictions on all insurance products except third-party motor insurance) led to broad underwriting losses," MIS said.

As a result, the sector's ability to generate internal capital has been undermined. According to the rating agency, the combined ratio (incurred losses + operating expenses as a percentage of premium) of private non-life insurers was high, between 117.7 percent and 106.4 percent over the past five fiscal years.

The rating agency also said the average solvency margin ratios fell to 200 percent as of the end of September 2014 from 275 percent as of the end of March 2013, versus the regulatory requirement of 150 percent.

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