Significant moderation in the growth of motor insurance business that was already under pressure, slowdown in health business, and sizeable provision for diminution in value of investments, impacted the performance of ICICI Lombard in the latest March quarter. The Covid-led disruption in business could accentuate the pain in the coming quarters.

While the motor portfolio is likely to be impacted by the subdued growth in new vehicle sales, no hike in third party (TP) premium rates for now, and postponement of renewal of policies, retail health indemnity and benefit portfolios (muted disbursement in banks, NBFCs/HFCs) could also witness moderation in growth. Likely increase in claims in the motor and health segments and notable fall in realised return on investment book could also impact earnings, going ahead.

That said, ICICI Lombard’s long-term focus on profitable segments ― remaining selective in businesses it underwrites, healthy solvency ratio, market leadership and strong focus on technology, should help it tide over the volatile times.

Headwinds ahead

In FY20, the company’s gross direct premium income (GDPI) reported a decline of 8.1 per cent year-on-year (YoY). But excluding crop (the company took a conscious call to exit the crop business), GDPI grew by 10.5 per cent YoY, which was in line with industry growth.

In the March quarter, GDPI grew by 2.9 per cent (excluding the crop segment), against the industry growth of 4.3 per cent. The lower-than-industry growth was mainly due to the company’s decision to remain cautious on the motor TP business. In the March quarter, the motor TP GDPI declined by 11.6 per cent YoY.

That said, the company has been focussing on the more profitable motor own damage (OD) business which saw a growth of 3 per cent in the March quarter. The traction is decent, given that the structural change in the segment (regulatory changes) was already impacting the business and the recent Covid-19 induced disruption has accentuated the pain.

In September 2018, the mandatory long-term insurance that kicked in required customers to take mandatory five-year TP cover for new two-wheelers and three-years for cars. Insurers vying for the more profitable motor OD business, have been competing intensely on pricing, which has led to fall in overall OD premiums in the industry. The weak auto volumes had impacted the business further.

The pandemic outbreak and consequent lockdown have further impacted the motor business, with new vehicle sales hit badly. Also, IRDAI had given a forbearance on renewal of motor TP and health policies falling due from March 25 to May 3 (payment can be made on or before May 15). This has also impacted the renewal business.

Going ahead, lower premium growth, lower renewals, and no hike in TP rates will continue to impact the business. The regulator had notified that insurance companies have to continue to charge TP premium rates that were applicable for FY20, and the earlier hike in TP rates for FY21 will not apply until further notice. While there has been a fall in claims/loss ratio (ratio of claims incurred to net earned premium) of both motor OD and TP in the March quarter owing to the lockdown, there could be an increase once the lockdown is lifted. Also, lower premium growth can further lead to increase in claims ratio.

In the health segment too, growth has been impacted due to the ongoing lockdown and lower disbursement from bank and NBFCs. Health, travel segment witnessed a 2.6 per cent GDPI growth in the March quarter. The increase in the overall commission and expense ratio during the quarter was mainly due to the lower commission on health reinsurance. Growth could remain subdued in the near term, but should increase over the long run. The claims ratio in the health segment has slightly inched up in the March quarter; it could increase further in the coming quarter. However, the company expects to mitigate risk by taking a cautious approach to government health schemes; within benefit it is only offering group policies to diversify the risk.

After increase in rates across eight sectors from March 2019, reinsurance rates were increased under the fire segment with effect from January 2020. This should aid growth in the fire segment. However, marine & engineering segments may witness decline due to reduced economic activity. In FY20, property and casualty GDPI (fire, engineering, marine, liability) grew by 20.4 per cent YoY.

Investment book

In the March quarter, the loss ratio fell to 69.9 per cent from 71.7 per cent in the December quarter, mainly on the back of improvement in motor segment claims. Two ratios ― loss and combined ratio ― are used to measure the profitability of an insurance business. While loss ratio is total incurred losses in relation to the total premiums, combined ratio measures the incurred losses and expenses in relation to the total premiums. Combined ratio inched up to 100.1 per cent in the March quarter (from 98.7 per cent in the December quarter) due to higher expense and commission ratio.

Profitability is also dependent on float management. ICICI Lombard has one the largest investment books amongst private players (at ₹26,327 crore as of March 2020). In light of interest rates softening and provision of ₹120 crore made for diminution in investments, the realised return on investment book has come down notably to 7.9 per cent in FY20, from 9.4 per cent in FY19. Going ahead, realised return could moderate further if rates continue to fall. This can impact the overall earnings of the company. However, ICICI Lombard’s strong solvency ratio of 2.17 times, market leadership and long-term focus on profitable segments lend comfort in uncertain times.

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