CRISIL says underwriting performance of general insurers remains dismal
November 18, 2009
Ratings agency CRISIL said that the underwriting performance of general insurance companies in India remains dismal and most players are yet to report underwriting profits. Strong investment returns continue to help the general insurance companies offset underwriting losses, and allow them to report overall profitability, it said.
“CRISIL believes that insurers will reduce the extent of discounting, as current prices are unsustainable and companies will need to adopt prudent underwriting practices along with cost-efficient structures to remain competitive. These measures should enable the industry to reduce its combined ratio by 5 to 10 percentage points over the medium term,” said Pawan Agrawal, director, CRISIL Ratings.
Underwriting performance in the industry has been under increasing pressure, especially since 2007, when key segments such as motor, fire, and engineering were de-tariffed. This pressure is evident from the sharp increase in underwriting losses to almost Rs50 billion in FY09 from Rs25.60 billion in FY07, the ratings agency said.
CRISIL, the unit of Standard & Poor's, said following the de-tariffing, insurers in India adopted aggressive strategies in an effort to gain market share. As a result, the industry’s combined ratio, net incurred claims and insurance-related operating expenses as a percentage of net premiums, was high at over 115% in FY09 and this is likely to improve, said Mr Agrawal.
Despite the significant underwriting losses, general insurance companies have been profitable on account of their strong investment returns. For FY09, the insurance industry’s overall profits were estimated to be about Rs5.50 billion. However, the dependence on revenues from investment can lead to volatility in profits, CRISIL warned.
CRISIL said that according to its analysis of the investment returns of public and large private sector insurers, the composition of the investment revenues has changed over time, with a steady shift from interest or dividend revenues to profit from the sale of investments. This trend is more pronounced among public sector insurers, which have reported strong returns by selling historical equity investments.
However, the ratings agency said, falling stock prices substantially constrained investment returns of general insurance companies in FY09 as the profitability of the sector declined by more than 50% compared with the previous year’s level.
To report sustainable profits, general insurance companies will need to generate revenues on their underwriting operations, instead of depending on investment returns, CRISIL added.
While underwriting performance will remain a challenge for the general insurance industry, the credit risk profiles of the CRISIL-rated public sector players are expected to remain strong. As of 31 March 2009, the market value of CRISIL-rated public sector general insurance companies’ investments exceeded their book value by more than 1.5 times.
“For private sector general insurance companies, CRISIL believes that strong parent support, prudent underwriting, efficient claims management, and superior client servicing will be key determinants of credit risk profiles over the long term,” said Tarun Bhatia, head, CRISIL Ratings. — Yogesh Sapkale[email protected]