The Hindu Business Line : Pressure on PSU non-life insurers to conform to statutory management ratio

Bangalore May 13 The Government and the insurance regulator have begun exerting pressure on the public sector non-life insurance companies to conform to the statutory management ratio of 19.5 per cent.

Highly placed sources said the Government and the regulator were insisting on compliance with the statutory cap since all the PSUs were operating well above it. Currently, the average management ratio of the four PSU non-life insurers is about 24 per cent. Under Section 40C of the Insurance Act of 1938, non-life insurers management ratio ceiling is fixed at 19.5 per cent of the gross direct premiums. The management ratio is a prescribed cost cap on wages, dividends and commissions.

The sources said that during the last few months, business acquisition costs have considerably escalated. This was in view of the intense competition among the insurers, post deregulation of tariffs. They said that the Ministry of Finance had insisted that the four PSU companies contain their business acquisition costs and accordingly bring down their management ratios.

This was in order to improve the profitability of the core operations.

Underwriting losses

Underwriting is a loss-making business for the four non-life insurance companies. In 2005-06, the combined underwriting losses of the four companies were in excess of Rs 3,000 crore.

Profits were being sustained by non-core operations, especially investments. In fact for the last three years, insurers have been booking large profits by selling some of their equity portfolios. Estimates were that in 2006-07 alone the four PSU insurers would be earning investment incomes in excess of Rs 300 crore. But the ability to sustain such profits was fast decreasing, the sources said.

This was largely because some of the profits earned were on equities that were acquired in the last decade or before. With premium incomes likely to remain flat during the year, the focus had shifted to containing the management ratios.

However, the sources said, PSU insurers had limited flexibility in containing the ratios presently. This was because the wages of PSU companies are decided on the basis of negotiations with the unions. Wages were last hiked 12 per cent in 2004. Moreover, the industry was now likely to see one more round of wage negotiations shortly, pushing for further increase in salaries.

Higher dividends

Besides, the sources said the Government was also insisting on higher dividends from the insurance companies, despite the fact that there has been no capital infusion since nationalisation of the industry. In 2005-06, the PSU insurers had paid a dividend of over Rs 300 crore.

In addition, the companies had also forked out large amounts as dividend distribution tax, corporation taxes and service taxes. The large financial demands on the PSU insurers were thus inhibiting their capitalisation, the sources added.

The option before the industry was to either push for another round of voluntary retirement schemes for shedding excess staff. But, some of the managements themselves are opposed to this move, especially in an environment of intense competition with the private sector. However, the major problem was that for raising productivity levels in the industry, translating into higher premium collections, the capitalisation itself would have to improve, the sources said.