GENERAL INSURERS UNDER SOLVENCY PRESSURE AS INVESTMENT VALUE DIPs

Bangalore: General insurers in the country have come under solvency pressure with the upheaval in the financial markets. Almost all the insurers have suffered steep depreciation in the value of investments. Under the current regulatory regime of the Insurance Regulatory and Development Authority (IRDA) at least 55 per cent of the investments have to be made in Government securities (20 per cent in Central Government securities, 30 per cent in State Government securities and another 5 per cent as loans to State Governments for housing).

The depreciation was expected to impact the solvency ratios of the general insurance companies. Currently insurers are expected to maintain a solvency margin of 1.5 times. The solvency margin is the excess of capital and value of assets over the insured liabilities.

No impact
Public sector insurers, however, said that there was unlikely to be an immediate impact on solvency. The impact was likely to be pronounced only if the interest rates continued on their present trajectory for the next three quarters.

PSU insurers also said that they already had substantial cushion against such a situation. The cushion was in the form of profits realised when equity markets had peaked last year. Each of the insurers, during the last three years, had booked trading profits in excess of Rs 500 crore a year. The profits were added to general reserves to augment capital.

Moreover, some of the insurers have also written back excess provisions to their profit and loss account. PSU insurers have also spotted opportunities in the turmoil. The Oriental Insurance Company’s Chairman and Managing Director, Mr M. Ramadoss, said, “This is an opportunity for us to raise our investment income.” Since the last few years, when interest rates were soft, PSU insurers’ investment yields had dropped to as low as 7.5 per cent.

But for the last financial year, PSU general insurers’ mean yield on investments rose to about 8.5 per cent. This year, estimates are that mean yields would exceed 9 per cent. In fact, many of the PSU insurers have bought into oil and fertiliser bonds during the last few weeks to push up their investment incomes. Refinery, fertiliser and FCI bonds are all categorised as government securities.

However, the worst hit in the financial markets upheaval are the private sector insurers.
Private sector insurers began operations at a time when government securities yields were at the bottom. But one private sector insurer said that it was not their main worry.

Private players’ worry
The concern was more from the high discounting in the insurance markets. Insurance premia in some of the low loss sectors were down by at least 60 per cent on year-on-year basis after deregulation. The drop in insurance premia implied that core profits of the private sector were under pressure. The depreciation in value of investments came as a double whammy for the private sector.

Source: C. Shivkumar
The Hindu Business Line