PSU NON-LIFE INSURERS TOLD TO FOCUS ON UNDERWRITING BIZ

Bangalore: As a prelude to equity dilution, the government has asked public sector non-life insurance companies to shift focus from top lines to bottom lines.

Highly placed sources said that at a meeting with the Union Finance Ministry officials last week, the four non-life PSU insurance heads were told to reduce their reliance on profits from investments, including sale of equities. Instead, they were told to turn around their core business — underwriting — and start generating underwriting margins. Underwriting margin is the difference between claims incurred and expenses and the premium earned. A positive underwriting margin implied that premium earned would be higher than claims.

Underwriting has remained a loss-making business for the PSU insurers. Insurers have instead cross subsidised underwriting losses with investment incomes since nationalisation of the non-life business in 1973. Between FY2005 and FY2008, non-life insurers managed to earn investment profits in excess of Rs 500 crore each on the back of soaring equity markets. In FY09, they were unable to sustain the high investment profits with the meltdown in the equity markets coupled with low yields from government securities.

The sources said the Finance Ministry is now insisting that underwriting incomes be made positive. This would mean containing the expenses as a per cent of the net premium earned. The alternatives would be to increase premiums especially in some of the loss-making portfolios or contain losses through tightening the claims mechanisms. The shift to underwriting profits is necessary for improving valuations as equity dilution in the sector is proposed by the end of this year. The sources said the tightening had already started with the third party motor pool taking off. Under thismechanism, all the insurers — both public and private — are expected to aggregate their motor third party risks. The claims are settled on the basis of their respective market shares.

Rural portfolios
In addition, sources said that insurers propose to expand their premium collections from rural portfolios this year. Rural insurance serves the primary objectives which include expanding insurance penetration in the country and at the same time serving social sector objectives.

Gross premiums in the last financial year from the non-life sector were barely 0.7 per cent of the gross domestic product, making the country one of the least penetrated regions in the world. This is despite expanded private sector role in the insurance sector.

However, insurers’ fascination for the rural sector also stems from the historically low claims of less than 50 per cent. The rural sector, which includes risk cover for households, farm implements and co-insurance with the Agricultural Insurance Corporation for crops, has traditionally had a low claims ratios.

Consequently, the sources said that the profits from rural penetration are also likely to be high.

Besides, they said a correction in premium rates was imminent in fire and engineering risks. This comes, after a steep drop in premiums of up to 70 per cent after deregulation in 2007. The opportunity for the correction was partly on account of the tightening of global reinsurance markets and the tight capital situation for private sector insurers which implied that their ability to undercut risk premiums were limited.

Source: C. Shivkumar, The Hindu Business Line