The Hindu Business Line : `First task is to make core business profitable'

THE new Chairman and Managing Director of Oriental Insurance Company Ltd (OICL), Mr M. Ramadoss, is a chartered accountant by training. He spoke to Business Line on his corporate vision for OICL and the future of the non-life-insurance industry.

Excerpts:

You are taking over at a time when competition has intensified in the industry. What is your agenda?

The agenda is clear for us. My first target would be to make the core business profitable. All the public sector companies currently have a combined ratio (claims and expenses) of 120-130 per cent. In about two to three years we would like to bring it below 100 per cent, so that we generate underwriting profits.

But given the historical baggage (motor portfolios), how are you going to achieve this?

You can't shy away from motor insurance. This is especially at a time when huge infrastructure investments are going on and when all the motor manufacturers have big growth plans. All the public sector companies have 40-43 per cent portfolios in motor. So, we must gear up to manage the portfolio and better claims administration. For instance, the own damage claims portfolio, which was about 60 per cent five years ago, is now 45 per cent. I expect it to be brought down to 35 and 40 per cent once the sector is detariffed.

Our leakages are more in third party claims. The basic need is to revise the third party premium rates, which is pending before the Insurance Regulator and Development Authority. If necessary, we must even outsource these third party claims. We have prohibited the issue of standalone third party motor policies unless they are our own renewals.

There has been this continuous talk of detariffing. What is your view on this?

The public and private sector companies have pleaded with the IRDA for detariffing of all sectors and all types of policies, including motor and fire. Once fire premium comes out of tariff, tailor-made policies are possible. Once detariffing takes place correct pricing will settle down and cross subsidisation of products will not last long.

The statute does not allow you to reject certain kinds of motor covers. How are you going manoeuvre around this to become profitable?

The statute does not say that we must necessarily accept any premium. Once detariffed, each company has the right to charge a premium and also the right to accept or reject.

You have a management expense ratio way above the statutorily prescribed 19.5 per cent. How are you going to bring this under control?

Yes. This is a major issue. Normally, the ceiling on expenses of an insurance company alone is taken for a nascent insurance industry. These restrictions were placed in the 1938 Insurance Act. This section has outlived its usage and should be removed.

Another fallacy is that the management expense ratio is controlled on the gross premium basis by the Act. The ratio has to be on a net premium basis. My personal opinion is that Section 40 C of the Insurance Act should be removed. The control should be more on net capital or capital adequacy rather than on expenses.

How much of capital would you require?

Depends on our growth. If we are able to grow at 10-15 per cent, we have a plan.

How are you going to raise this capital?

Actually, we have unrealised capital locked up in our investments. Our book value of investments is Rs 1,000 crore. The market value of those investments is Rs 4,000 crore. We, therefore, have hidden reserves of Rs 3,000 crore. Perhaps if we churn these equities and realise cash, it would be one way of buffering our capital immediately.

None of you have touched the Government securities portfolios for realising capital.

We started doing it last year. But in the case of G-Secs we do have a statutory obligation to hold. It is about 50 per cent of the total investments.

Above that we have a small margin to sell. In the case of State Government securities we have to hold 20 per cent. Wherever securities are not saleable, we will hold till maturity. Where there are defaults in interest payments we make NPA provisions consistent with the RBI guidelines.

When you talk about growth, what about bancassurance arrangements?

Bancassurance and tie-ups have really contributed to growth. We have tie-ups with Oriental Bank of Commerce, Dena Bank and State Bank of Saurashtra. It has helped us to get regular business..

The tie-up arrangement will ensure a steady flow of business and a steady flow of revenue for the banks.

Do you foresee a situation where bancassurance will mature into cross holding of equity stakes?

Now it (bancassurance) is just testing the waters. It is basically a decision of the banks and whoever comes forward we could think about it.

Is there a shortage of capacity especially given the pace of GDP growth?

Our retentions have been rising. For instance, in the case of fire and package policies we are able to retain Rs 50 crore of the sum insured of any particular company. We have a treaty arrangement within the insurance companies.

For amounts up to Rs 250 crore on a PML (probable maximum loss) basis for which the sum insured could be about Rs 500-600 crore, the premiums are retained within the country.

This certainly is the advantage of public sector insurance companies.New players do not have that much capital for retention. Besides, GIC has huge capacities. They are prepared to take reinsurance. Capacity is not a constraint.

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`First task is to make core business profitable'