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General insurance companies, already reeling from price undercutting and poor underwriting of risks, now face a further blow to their profits. They now have the burden of higher provisioning for losses on their motor portfolio — specifically on their third party pool.
Third party motor pool is a corpus of premiums transferred from all general insurance companies to meet the claims arising out of road accidents involving damage to life or limb of third parties, mainly caused by trucks. Currently this pool of premiums is estimated at around Rs 3,500 crore. But this is running at a deficit because the losses are much higher. To plug this loss, the Insurance Development and Regulatory Authority has asked insurers to make additional provisions of about Rs 3,750 crore on account of the motor pool for the last four years.
The general insurance industry will suffer as a result of the provisioning because the liability of three years is being absorbed in the financials of 2010-11, a single year, said Mr Rakesh Jain, Director Corporate Centre and Chief Financial Officer, ICICI Lombard. The insurance regulator has asked insurers to make a provisioning of expected loss ratio of 153 per cent. This means, for every Rs 100 earned as premium, companies will have to payout Rs 153 as claims.
Rating downgrade
In its recent report, rating agency Standard and Poor's has downgraded its outlook for the Indian general insurance industry to negative from stable due to poor underwriting of risks following the dismantling of the tariff regime.
The financials of state-owned companies seem to have turned from bad to worse for the nine months ending December 31, 2010, with the exception of United Indian Insurance. The others three insurers, National Insurance, New India Assurance and Oriental Insurance, have posted a loss on their investment income. For years, public players made profits only from their investment income and not from their core business of underwriting insurance.
Fourteen private insurers reported Rs 782 crore underwriting losses for the nine months ending December 31, 2010.
Mr S. L. Mohan, General Secretary, General Insurance Council (a self-regulatory body), said that the provisioning would impact the underwriting losses of general insurance companies. However, the extra provisioning will be made in the books (physical entry) of insurers and paid only when there are claims.
Dr Amarnath Ananthanarayanan, CEO and Managing Director of the two-half-year-old Bharti Axa General Insurance, said provisioning to be made on account of motor pool would adversely impact the underwriting losses of insurers.
“Bharti Axa General enjoys the last mover advantage and, therefore, will not have to absorb the provisioning to a large extent,” he said.
The Standard and Poor's report said that underwriting performances are unlikely to improve significantly in the next 12 months, despite signs that prices are stabilising. The overall industry remains profitable through investment income, but that can leave it vulnerable to investment market shocks.
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