The Hindu Business Line : PSU insurers may report underwriting profits

Bangalore, Feb. 7 The underwriting business of the four public sector general insurers is expected to slip into the black this year with the transfer of the high loss statutory business to the India Motor insurance Pool (IMIP).

The transfer to the IMIP would result in reducing losses incurred due to claims settlements on motor third party liabilities. This was because the losses would now be split among the 13 general insurers in the country, nine of them in the private sector.

The sources said that the benefits would accrue not just from loss reduction and greater retentions. The benefits would also come in the form of lower transfers to technical reserves. The technical reserves include the Reserves for unexpired losses and provisions for Incurred, But Not Reported risk. Both these are not treated as part of the capital.

‘Too early to quantify’

But the Chairman of the General Insurers’ Public Sector Association, Mr. M Ramadoss, said, “It is too early to gauge the benefits, since the pool accounts are to be finalised. We will still have to go by the past experience in making the provisions.”

Currently, insurers make provisions for unexpired losses equivalent to 50 per cent of their incremental premiums. The accumulated reserves for unexpired risks with the 4 PSU insurers are currently at Rs 6,700 crore. Even private sector insurers have made such provisions in the past, as a statutory requirement. However, some private sector insurers were able to write back the provisions, in view of their low exposure in motor third party liability business.

With the inception of the pool this year, industry sources said, private sector insurers would no longer be able to write back as in the past. This was because the liabilities from the pool are to be shared on the basis of the respective market share. The sources said that the large transfers to the provisions in the past had impacted the underwriting profits of the PSU insurers since technical provisions are treated as above-the-line items.

The sources said that as the losses of the PSU insurers reduce due to the transfer to IMIP, they would also be in a position to write back excess provisions into their respective profit and loss accounts and improve their profits. In fact, the sources said that IMIP was also likely to help in improving their underwriting margins beginning from the current financial year. Underwriting margins, a measure of profitability, are expected to be close to 2 per cent this year.

Other gains

But, the sources said, provisions’ write-back would be used to strengthen PSU insurers’ capital and solvency margins. Insurers, under the current guidelines, are expected to maintain a solvency margin – the excess of the capital and the value of assets over their liabilities – of 1.5 times. The solvency margins during the last two years were largely supported by profits from trading in equities. Besides, insurers have shifted to a quarterly reporting of solvency to the Insurance Regulatory and Development Authority (IRDA).

The sources said that the write-back of excess provisions would also help the PSU insurers to buffer themselves from the current weak insurance markets characterised by an over 70 per cent drop in tariffs after migration to deregulated regime. Premium collections have decelerated to Rs 20,795 crore for the first nine months of the current year or a growth of just 12 per cent over the corresponding period of the last financial year. The excess provisions, the sources said, would partly help offset the impact of the drop in tariffs, they added.

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