The Hindu Business Line : PSU insurers sign pact with Ministry on targets

Public sector general insurers have signed a Statement of intent (SOI) with the Ministry of Finance spelling out a time line for achieving underwriting profits.

Highly placed officials said that the SOI sets specific targets for achieving profits on its underwriting business for the current financial year. The SOI linked the employee incentive payouts for achieving the targets. This is the first time that such criteria were prescribed for general insurers.

The officials said that the insurers were expected to achieve 50 per cent of the committed targets in the SOI as a pre-requisite for making employee incentive payouts. The SOIs are identical to the memorandum of understanding the government signs with PSUs. PSUs are then classified as Navaratna or Mini-Navaratnas, though no PSU insurer currently falls into that category. The officials said that the SOI was also a prelude to a stake dilution from one or all of the insurance companies.

Severe underwriting losses

The officials said accordingly that the SOI was focused to ensure that the PSU insurers start generating positive underwriting margins. Underwriting margins imply the excess of the claims and expenses over the premium earned. Underwriting margins of all the four insurers are red-lined, as the loss and expense ratios were in excess of 100 per cent from underwriting losses. All the four insurers are faced with severe underwriting losses that have mounted to Rs 4,292 crore, post deregulation of premiums. The highest underwriting losses were for New India Assurance Company Ltd at Rs 1,440 crore, largely in view of its size.

So far, insurers have offset their underwriting losses, through investment profits. However, officials said that the ability of the insurers to neutralise underwriting losses through investment profits have considerably deteriorated. This was partly in view of the current volatility in the equity markets. Besides, some of the new assets were acquired at high prices.

The officials also said that in the past, while the sale of the investments were used for capital requirements, holding to investments would be required for precisely the same reason. Insurers currently value the assets on the basis of a book value. Consequently, they had sold the investments to unlock the real value and credit the proceeds to the general reserves. This had consequently helped the insurers improve their solvency ratios.

Marked to market?

However, the sources said, Insurance Regulatory and Development Authority (IRDA) was pushing insurers to move into a marked to market regime for assets. Accordingly, there are fears that such a regime is likely to translate into depreciation and impact the already fragile balance sheets. Holding on to the existing investments was preferable in view of the possibility of appreciation in the value, after migration to the MTM regime, as prescribed in the Solvency Regime of the International Association of Insurance Supervisors (IAIS). IAIS is the insurance sector equivalent of the Bank for International Settlements.

Assets appreciation

Appreciation of the assets, the sources explained, would result in improving the solvency margin (Solvency is the excess of capital and the value of assets over the insured liabilities). Presently excluding the technical reserves, provisions for unexpired losses and provisions for incurred but not reported events, the four public sector insurers already have solvency margins of over 2 times as against the regulatory prescription of 1.5 times.