Insurers here feeling US sub-prime heat

Private players may take harder hit

The contagion effect on domestic capital markets such as fall in Sensex and hardening yields imply a depreciation in the value of financial assets of the insurers.

India’s general insurers are becoming nervous as the meltdown in the US sub-prime mortgages market gathers momentum.

The jitters come even as domestic reinsurance requirements are on rise. Some of the major reinsurance companies with whom Indian general insurers have treaties and facultative Reinsurance (FacRe) arrangements include European reinsurers.

Speaking to Business Line, the General Insurers Public Sector Association Chairman, Mr M. Ramadoss said, “We are watching the situation. But there is no worry. PSU reinsurance arrangements are only with AAA-rated reinsurers.&# 8221;

However, even AAA-rated reinsurers, such as Munich Re have revealed that they had exposures equivalent to €600 million ($822 million) in the US sub-prime market.

The exposure of Allianz Insurance, the Europe’s largest insurance company, is estimated at €1.7 billion.

But Indian insurers also have reinsurance arrangements with lower rated companies for their FacRe contracts.

(In FacRe contracts, reinsurers have no underwriting obligation, but can assess each risk individually).

‘No fear’
Insurers said they feared no defaults from reinsurers, in view of their global size and the comparatively small size of Indian liabilities.

But domestic insurers have suffered reinsurer defaults from Asia companies in the past.

In fact, the Insurance Regulatory and Development Authority has already sent a note to all the general insurance companies seeking details of such past defaults. Indian insurer defaults from reinsurers are estimated at close to about Rs 1,000 crore, mostly from East Asian companies due to insolvency.

But sources said the sub-prime meltdown was likely to hit the private sector insurers worst, in view of their high reliance on reinsurance markets.

The high reliance was largely for meeting the stringent regulatory solvency margin of 150 per cent and low retention ratios. Solvency marginis the excess of capital and value of assets over the insured liabilities.

High retention capacities
In the public sector, however, the combined capitalisation of the four companies – New India Assurance Company Ltd, National Insurance Company Ltd, United India Insurance Company Ltd and Oriental Insurance Company Ltd, is about Rs 15,000 crore, implying very high retention capacities. But even PSU capital may be insufficient, if insurance coverage is to increase to Asian levels of 6 per cent of GDP.

The sources said the sub-prime impact on the insurers would also be felt due to the contagion effect on domestic capital markets. Falling values of the Sensex and hardening yields implied a depreciation in the value of financial assets of the insurers. This depreciation, the sources said, would have a direct impact on the solvency margins of the insurance companies.

This was especially at a time when insurers were preparing to move into a regime of dynamic solvency reporting instead of the current annual reporting.

Source: The Hindu Business Line