The Hindu Business Line : PSU insurers want credit rating of all players

Bangalore, Aug. 30 Public sector general insurers have pitched for a credit rating of all industry players with the transition to a market pricing mechanism.

Among the four PSU insurers, New India Assurance Company Ltd, Oriental Insurance Company Ltd, and National Insurance Company Ltd enjoy ‘AAA’ rating from Crisil.

United India Insurance Company Ltd is rated IAAA by rival rating agency ICRA. ‘IAAA’ is an insurance specific rating.Besides, the private sector insurers ICICI Lombard General Insurance Company Ltd and Allianz Bajaj General Insurance Company Ltd are also IAAA rated.

However, not all the private sector entities have published their ratings. But sources said that the four companies have begun pushing for mandatory rating of all the insurers. In fact, the PSUs have indicated that rating alone was not sufficient.

In fact, they have pushed with the Insurance Regulatory and Development Authority (IRDA) for bringing the credit ratings into the public domain, as in the banking sector.

The Chairman of the General Insurers Public Sector Association (GIPSA) and OICL Chairman and Managing Director, Mr M. Ramadoss, said, “Credit rating will impose financial discipline on insurers.”

The financial discipline referred to is cutting down underwriting losses on a portfolio basis and ensuring compliance with the mandated management ratio of 19.5 per cent.

Advantage PSUs

The ratings currently made are intended to reveal the solvency and also the claims paying ability of the insurers, particularly important in a deregulated pricing environment. The criteria in rating put the PSU insurers clearly on top of the league table.

Under the existing criteria prescribed by IRDA, the regulator’s required solvency margin is 1.5 times the insured liabilities. This implied that the capital and value of the assets of the insurer would have to be at least 150 per cent in excess of the insured liabilities.

PSU general insurers currently have a combined capitalisation (paid up equity plus reserves) of about Rs 15,000 crore. In addition, the companies’ technical reserves and adjusted policy holder surplus are around 100 per cent indicating their very low financial leverage. This was clearly indicative of the high reserves against adverse claims situations.

However, the reserves have been created largely out of profits generated from investments, since the underwriting margins have mostly been negative in the past. It is only recently that the underwriting margins are becoming positive for the PSU insurers.

Underwriting margin is used to determine the underwriting profit or loss, based on 100 per cent being the breakeven point. If the total claims/loss ratio and expense ratio versus the premium written is less than 100 per cent, it indicates underwriting profit and vice versa.

After a long gap, only in 2006-07 PSU insurers have broken out of the negative underwriting margin cycle and moved into the positive territory, albeit slim. Currently, the total claims/loss ratio and expense ratio is about 99 per cent.

But the high ratings and retentions had resulted in high international confidence levels of PSU insurers. As a result, all the four PSU insurers are underwriting reinsurance business for Asian, European, African, and West Asian clients, though mostly in participation with other global insurers.

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