The Finance ministry has warned state-owned general insurance companies for huge underwriting losses and their dependence on investment income for profits. In a letter to the chiefs of PSU non-life insurers, the Department of Financial Services said, “It has been brought to the notice of this department that the public sector general insurance companies (PSGIC) are violating government advisories leading to huge underwriting losses. As a result, these companies are solely dependent upon the investment income (profit from sale of investment).”
“These are limited investments and are fast depleting as a result of indiscriminate disposal by the companies to make up for the losses on underwriting premiums. Such an arrangement is not sustainable in the long run and has the capacity to permanently harm the competitiveness of the public sector insurers,” the DFS letter said.
The four PSU non-life insurers are: New India Assurance, Oriental Insurance, United India and National Insurance.
According to the Insurance Regulatory Authority of India (IRDAI), the underwriting losses of the non-life insurance companies rose to Rs 14,962 crore in 2015-16, from Rs 10,576 crore in the previous year. The underwriting losses increased by 41.47 per cent over previous year, it said. IRDA is yet to come out with losses for fiscal 2016-17.
Of this, PSU insurers’ losses increased by 54.42 per cent to Rs 10,839 crore in 2015-16 from Rs 7019 crore in 2014-15. The private sector insurers’ losses increased to Rs 3,662 crore in 2015-16 from Rs 2495 crore in 2014-15. The government’s warning has come at a time when PSU insurers are getting ready to come out with initial public offers (IPOs) and list their shares on the bourses.
The DFS letter cited one case of violation of advisory/ internal circulars on health insurance and stated that “clarification has been called from a PSGIC and disciplinary action is also contemplated”. “It may be noted that an appropriate pricing mechanism for pricing group health insurance should take into account the existing incurred claims ratio (ICR), management expenses, medical inflation, commissions, likely increase in quantum of claims due to ageing of covered group, increase in size of group, cost of underwriting of business and other associated factors,” the letter said.
“Thus, in order to protect the interests of the policy holders, ensure that the PSGICs continue to be effective players in the market for provision insurance services on a long-term basis and ensure that unhealthy underwriting practices in these companies do not cause unnecessary financial strain on their financial stability, it’s desirable that prudent underwriting practices suggested in government advisories are followed strictly,” the DFS letter to insurance CMDs said.
On the high underwriting losses, KK Srinivasan, Former Member, IRDAI, said, “the excuse of some PSU Insurers that private sector insurers are also making underwriting losses is flimsy. The proportion of underwriting loss to total premium written in PSU insurers is alarming. For example, the total premium of New India, the largest non-life PSU, is only double that of ICICI Lombard the largest private sector non-life insurer, but its underwriting loss is over seven times that of ICICI Lombard. Alarming indeed.”
“It is high time that the government moved in and punish PSUs which are indulging in reckless sale of investment assets to cover up their underwriting losses before it is too late,” Srinivasan said.
However, PSU insurers said they are making efforts to bring down underwriting losses. “We are adhering to careful underwriting of GMC (group medi claim) in line with the avowed objective of commercial prudence. OIC’s approach of prudent underwriting is acknowledged in the Indian market. Hence we are comfortable with the guidelines since we are already following the same. Being fully owned by the government, we are committed to actively participate in the mandated programmes such as PMFBY and PMSBY and strive our best to marry commercial prudence with our obligation to achieve spread of insurance to the bottom of the pyramid,” Oriental Insurance (OIC) CMD AV Girija Kumar said.
“We are deeply committed to control underwriting losses. And in the interests of policyholders and shareholders we have unhesitatingly provided best actuarial estimates reserving fully as of March 31, 2017 and no liability was carried forward. This highlights OIC’s commitment to excellence in governance practices. We are looking forward to the future with confidence as a company with strong financials and investment book and particularly sound underwriting and governance practices.”
New India Assurance, the largest insurer, suffered an underwriting loss to the tune of Rs 3,500 crore in 2016-17 primarily due to three big fire incidents in the year as well as the Chennai and Wardha cyclones. In FY16, its underwriting losses were Rs 3,100 crore.