The Hindu Business Line : PSU insurers ride equity boom to beef up capital

Public sector insurance companies have beefed up their capital on the back of the equity boom and are taking their combined capitalisation close to $2.5 billion (Rs 11,500 crore).

Sources said that this large capitalisation of the PSU insurers was now helping to improve retention capacities. This implied that the insurers had sufficient reserves to retain the premiums within the country itself. All the insurers have also made large provisions. These provisions were against unexpired liabilities and for losses that have been incurred by customers, though not reported. If the provisions were also included, the actual capitalisation would increase well beyond $3 billion. But none of the insurers currently factor provisions as part of the reserves, since they are treated as policyholder's funds.

The improved retentions were evident from the narrowing gap between gross and net premiums. This ratio reflects the quantum of reinsurance that is resorted to by the domestic PSU insurers. In 2006, the ratio was 72 per cent. Three years ago, it was about 63 per cent. The improvement in the ratios indicated that the retentions in the country were on the rise. The narrowing gap was also largely on account of the pooling and coinsurance arrangements adopted by the PSU insurers. This arrangement allows risk sharing among all the four PSU insurers - New Indian Assurance Company Ltd, Oriental Insurance Company Ltd, National Insurance Company Ltd and the United Indian Insurance Company Ltd.

However, PSU insurers said that the improved ratio was also on account of treaty arrangements and creation of a separate domestic reinsurer, the General Insurance Corporation. Most of the reinsurance treaties by the PSU insurers are on a reciprocal basis with the global reinsurers.

Besides, Indian insurers also have premium inflows from South East Asian countries. With some of these insurers, almost all the public sector companies have reinsurance support arrangements, who prefer Indian companies.

The sources said that the comfort levels of foreign insurers with Indian PSUs were largely driven by the high degree of regulatory intervention and high solvency margins of the PSU insurers. The prescribed solvency margin for the domestic non life insurance companies is 150 per cent by the insurance regulator. This implied that the value of the assets and capital should be more than the insured liabilities.

Almost all the PSU insurers were way above this margin. This was despite the fact that the overall underwriting business was still in the red on account of the miscellaneous portfolios that included motor and medical covers. The underwriting losses were largely offset by the investment income flows during the last few months. During the last financial year alone, each of the PSU insurers had booked profits in the equity markets in excess of Rs 450 crore.

Besides, with yields on government securities and corporate debt papers on the upswings coupon receipts of the companies had also improved taking the mean yield on investments close to nine per cent currently. Two years before, this figure was less than 7 per cent.

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