Life insurers in good health, but non-life companies under stress

The report by the Committee on Financial Sector Assessment (CFSA) has raised concerns over the liquidity, earnings and profitability of non-life insurance companies.

According to Rakesh Mohan, deputy governor of RBI and chairman of CFSA, there is no concern over the solvency and capital adequacy for life insurance companies, but non-life insurers continue to have their profits, earnings and liquidity under pressure.

“The high ratio of net claims to net premiums point to the need for better quality control in respect of underwriting new business, better risk management and increasing reinsurance,” the report said.

Ritesh Kumar, managing director and CEO of HDFC Ergo General Insurance, said, “The function of the investment portfolio is managed as per the Irda guidelines and 30 per cent of the portfolio is in government securities and, hence, there is no liquidity problem.”

TA Ramalingam, head of underwriting at Bajaj Allianz General Insurance Company, said, “It is true that most companies in this sector is seeing a price war and not much of prudential underwriting is happening.”

According to the CFSA report, during the past five years, the insurance sector has grown in size and penetration. Deregulation has resulted in more diversified insurance product offerings, with a stress on marketing and distribution strategies. Though the concentration in the insurance sector is very high, it has shown a declining trend since the sector was opened to private participation. While the government has been emphasising on the need for enhancing FDI limits owing to the global financial turmoil as also the absence of an enabling regulatory framework, the issue needs to be addressed in a medium-term perspective.

While the equity shock does not impact the solvency ratios of the companies significantly, increase in withdrawal experience results in improvement of solvency ratios as the release of reserves in these cases outweighs the reduction in assets associated with withdrawals. The solvency ratio is sensitive to interest rate and expense variation. Life insurance companies need to pay more attention to expense management and to develop appropriate and timely Management Information Systems (MIS) in this regard. A senior official from Max New York Life Insurance Company told Financial Chronicle that when investment in unit-linked fund goes down, it does not affect the solvency margin of the company

Source:mydigitalfc