General insurance players have seen a slew of regulatory changes over the past two years. Aside from the changes in the motor insurance segment, the recent regulatory tweaks in health insurance policies are expected to lead to greater transparency, uniformity and benefits for customers over the long run, says Gopal Balachandran, CFO and Chief Risk Officer at ICICI Lombard General Insurance. While intense competition in the motor own- damage segment has caused some pain in the near term, ICICI Lombard continues to focus on profitable segments of the business, he added. Excerpts from an interview:
How has mandatory long- term motor insurance that came into effect in September 2018 impacted you?
The mandatory long-term insurance requires customers to take mandatory five-year third-party (TP) cover for new two-wheelers, and three-year (cover) for cars. But for own-damage (OD) cover, a customer could either take it for a longer term or just for one year and then subsequently renew it. Hence, in September last year (2019), insurers including ICICI Lombard started issuing standalone OD covers.
At ICICI Lombard, we made a strong pitch to customers for standalone OD covers, educating them on the fact that they have long- term third-party cover but need to renew their OD cover.
Over the past four months, we have seen the thrust on renewal of own-damage covers pay off and seen an increase in retention of customers.
Motor insurance is a function of new and renewal policies.
Hence, the underlying weak auto volumes have impacted us marginally, as we have been able to strengthen distribution with OEMs (original equipment manufacturers)/dealership touch points. We have also seen new players such as Kia and MG Motors enter the Indian market, which has aided growth. We have also expanded our distribution in agency and virtual office touch points.
Hence, in the nine- month period of April-December 2019, ICICI Lombard has been able to deliver higher growth than the industry in motor own- damage. Also, the company continues to focus on profitable segments of business. For instance, the company has been very strong in the more profitable two-wheeler (29.5 per cent of motor GDPI - Gross Direct Premium Income) and private car segments (55.9 per cent). We have been cautious on the commercial vehicle (CV) segment.
The regulator revised the TP rates effective June 16, 2019.
While the increase in (TP rates of) cars appear attractive, it has been far lower (single-digits) in CVs than in earlier years.
So, we have been cautious on the CV segment.
There has been a notable increase in the loss-claims ratio of ICICI Lombard in the motor segment — to 69.6 per cent in the nine months ended December 2019 from 58.4 per cent last year. Why?
The pricing competition has intensified in motor OD, given the weak underlying economic growth and players competing for a share of the pie. Insurers issuing standalone OD covers from September 2019 has also led to further price competition.
As claims remain the same, reduced pricing has resulted in higher claims-loss ratio (ratio of claims incurred to net earned premium).
The intensifying competition in motor OD has come to a point where it has started to hurt the industry. Hence, pricing competition should ease and sanity should return soon.
Should customers go for long-term own-damage motor insurance or take it for a year and renew it subsequently?
In terms of both insurers and customers, long- period insurance cover is a win-win. As third-party rates are generally revised upwards every year, locking into a long-term TP obviously works in favour of a customer.
In case of OD, too, customers gain on the pricing front.
For instance, for a two-wheeler, the five-year OD cover costs about 3-3.5 times the cover for one year. Similarly, in the case of a car, a three-year cover works out to about 2-2.5 times. The only flip side is that the amount one has to shell out is relatively large.
But this generally gets financed (with vehicle loans).
The Motor Vehicles Act 2019 that came into effect from September 2019, aside from increased penalties, also capped the time limit on intimation of claims. How has this impacted your business?
The Motor Vehicles Act 2019, aside from increased penalties for driving errors, also increased the penalty for driving an uninsured vehicle. This (has) led to a lot of customer awareness and increase in motor insurance issuance.
The other key change was in the time limit on intimation of the claim. Earlier, there was no time limit for intimation of a third-party claim. The Act puts in a limit of six months — the claim has to be made within six months of the occurrence of an accident.
So, earlier it was difficult to ascertain the genuineness of a claim if it was filed after 4-5 years. Now, with the time limit of six months being introduced, the expectation is that reporting of fraudulent claims will reduce. Hence, there should be a reduction in claim frequency, which is a positive for insurance companies. But given the uncertainty around reduction in claim frequency, ICICI Lombard has continued with its current approach to reserving (provisioning).
But profitability for an insurer is also dependent on float management, which is the investable asset base that can be deployed to generate returns for shareholders. This reduces with the cap on claim time...
Yes, it does. Insurance companies collect premiums upfront and pay claims afterwards.
This creates a float, or an investable asset base, that can be deployed to generate returns for shareholders. But over the long term, as the claims ratio reduces, the net impact of this should balance out. We believe that profitability should improve over the long run.
The realised return on ICICI Lombard’s investment book has come down notably in the past year to 6.3 per cent in M9FY20 from 9.4 per cent in FY19. How does this impact your returns?
There are always periods of softness/cycles in interest rates.
Profitability is also dependent on float management. The average realised return of ICICI Lombard over the past 19 years has been 10 per cent; but within this, the lowest return made would have been around 7 per cent and the highest would be about 14 per cent. Going ahead, 10 per cent may not be sustainable, and we expect about 8-9 per cent realised return.
But with four- times investment leverage (total investment assets/net worth), the pre-tax ROE works out to about 32 per cent.
Post-tax, a sustained ROE of 20 per cent is healthy enough. ICICI Lombard has one of the largest investment books amongst private players (at ₹ 24,845 crore as of December 2019).
Under health insurance, too, there have been many changes, including guidelines on standardisation of exclusions in health insurance contracts. How does this impact players?
The regulatory changes are very recent and we need to see how this pans out. But by standardising basic health cover, the IRDAI (Insurance Regulatory and Development Authority of India) has helped bring in more uniformity and ensure that a larger portion of the population has some form of health insurance cover. Insurance companies can build on the standard cover and offer additional features to customers.
However, the pricing is left to the discretion of the companies.