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Saturday, Nov 06, 2004

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Non-life public insurers may tap capital market

C. Shivkumar

Bangalore , Nov. 4

A DILUTION of Government stake in the four public sector non-life insurance companies is likely this year in view of the large capital requirements to sustain growth.

High-level sources said, the Finance Minister, Mr P. Chidambaram, had indicated that the Government was unwilling to pump in more capital at this juncture, in view of the tight fiscal situation. Instead he conveyed to the officials that the sector was "ripe for disinvestment."

At a meeting in Mumbai last week with the Finance Minister, top officials of National Insurance Company Ltd, New India Assurance Company Ltd, United India Insurance Company Ltd and the Oriental Insurance Company Ltd, raised the issue of the undercutting of business by the private sector.

The PSU insurers also raised the issue of passing on agency commissions as discounts to corporate customers by private sector insurers and islanding of high-risk motor insurance business exclusively with the four public sector companies.

The sources said that the Finance Minister was told that one of the major reasons for the core losses by the companies were entirely on account of this kind of islanding and the absence of free pricing of risks in the motor business to commensurate with the losses.

In fact, PSU insurers have still not managed to contain loss ratios despite reduction in management expenditure. This was due to the absence of a free pricing regime, the sources said. Claims ratios for all the four companies for the last year continued to be over 100 per cent.

This implied that the net claims were in excess of the net premiums collected. The netting was after providing for reinsurance support. The losses on third party motor insurance alone continued to hover around 150-200 per cent.

For the public sector insurers, motor insurance was approximately 50 per cent of their premium income.

In fact last year, for the first time, most of the non-life insurers resorted to treasury operations, departing from the convention of holding investments till maturity, especially Government securities.

All of them had also sold some of their high coupon securities in the debt markets taking advantage of the soft yield regime.

Besides the PSU insurers earned at least Rs 300 crore each by selling equity of their blue chip investments. This had contributed to their profitability and also allowed them to dress up their balance sheets despite the red lined core operations, the sources said.

However, the sources said, this year the insurers would require more capital support from the Government to sustain the growth momentum and also for absorbing the erosion in the solvency margins.

The erosion this year was on account of hardening yields and, consequently depreciation in the value of their respective Government securities.

Insurers, according to current guidelines, are expected to park the bulk of their investments in Government securities, at least 50 per cent of their investments in Government securities and another 25 per cent in the social sector or in the Government securities.

These investments have depreciated considerably, the sources said, leading to erosion in their respective solvency margins.

The four companies are currently capitalised at over Rs 5,000 crore.

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