The Hindu Business Line : PSU insurers upset over new tariff norms

Although IRDA appeared to have axed controls, in reality, all rates being offered to customers would have to be approved by the regulator under the file and use guidelines.

C. Shivkumar

Bangalore, Jan. 1 Public sector insurers are upset over the new tariff deregulation guidelines of the Insurance Regulatory and Development Authority (IRDA).

IRDA’s new tariff guidelines come into effect today. The new guidelines have removed price controls and ushered in a free pricing regime for fire and engineering risks. It is only in the case of the motor third party risk that the regulator would apply pricing controls.

However, top PSU insurance officials are unconvinced. The officials said, “There is no level playing field in the IRDA’s guidelines.” Although IRDA appeared to have axed controls, in reality, all rates being offered to customers would have to be approved by the regulator under the file and use guidelines. In fact, in September, the regulator had intervened to impose a ceiling on the maximum discounts that insurers could offer, after PSU insurers had pushed down tariffs by over 60 per cent, in the face of the intense competition.

Shrinking market share

The fear was that the discretion would allow private sector insurers to further nibble market share. PSU market share has already shrunk to just 35 per cent for the first 8 months of the current year. The fear was also on account of the fact that the regulator’s notification now focuses on the operating ratio instead of solvency. The IRDA has said that rate schedule approvals would be done only if the operating ratio (operating expenditure/operating revenues) did not exceed 100 per cent. PSU insurers already have positive underwriting margin of anywhere between 7 and 10 per cent, implying high level of profitability. But the underwriting margins in the case of the private sector were higher due to absence of legacy losses and high reliance on reinsurance.

Rely less on reinsurance

The officials said that unlike the private sector, PSU insurers have a lower reliance on reinsurance markets for supporting their solvency. At least 50 per cent of the private sector insurers’ risks are reinsured, both through treaties and through the Facultative route. The high reinsurance was on account of their low capacities to take risks directly on to their respective balance sheets.

However, the public sector capitalised close to Rs 20,000 crore excluding the technical reserves (provisions for unexpired risks and provisions for risks incurred but not reported) was in a position for greater retention of risks in the country. Consequently, the officials said that the PSUs would remain well above the IRDA’s prescribed solvency margin of 1.5 times. This solvency entails insurers to have an excess of at least 150 per cent in capital and asset value of all the insured liabilities.

The officials said that even assuming a conservative book value based valuation of some assets, PSU insurers were compliant with the solvency margin. In addition, the officials said the insurers had further added to their general reserves profits incurred through trading in equities. Such trading has raked in profits in excess of Rs 500 crore each, most of which would be used to strengthen their respective capital.