Non-life insurers still rely on investment for a profit

Non-life insurance companies continue to compete amongst themselves for chunky corporate businesses, offering insurance at unviable rates to expand market share, thereby reporting underwriting losses. This is despite the fact that it's been more than a decade since the industry was freed of price controls in 2007.

Contrary to the global trend, domestic non-life companies remain dependent on their investment portfolio for profitability, since they have been reporting underwriting losses in competitive segments, but not in segments where pricing is mandated by regulations such as motor third party insurance.

Over the years, the investment portfolio of the non-life insurance industry has swelled from Rs 48,891 crore in FY10 to Rs 2.55 lakh crore in FY19, a compound annual growth rate of 20.2 per cent. Investment earnings have been helping insurers to report an overall profit.

Experts say insurers have to offer a better service experience along with product innovation to their clients to have a sustainable business model.

It has been noticed that the combined ratio of the public sector players is generally more than the combined ratio of their private sector peers. The combined ratio--which is the aggregation of the loss ratio (claims relative to premiums written) and the expense ratio (operational and commissions expenses incurred relative to premiums written)remained over 100 per cent for most companies.

Combined ratio measures the money flowing out of an insurance company in the form of claims paid, expenses, and losses and compares the same against money flowing in, that is, net premiums. A ratio below 100 per cent indicates underwriting profit, while a ratio above 100 shows that more money in claims is being paid out than is being received from premiums.

According to a study by Care Ratings, the combined ratios for all the 33 non-life insurance and health insurance companies for the first half of FY20 showed that only two insurers, namely Shriram General and SBI General Insurance, reported a combined ratio below 100 per cent while Religare Health Insurance, ICICI Lombard General Insurance, ECGC and Bajaj Allianz General managed to keep it at 100 per cent. However, Oriental Insurance, United India, National Insurance, Aditya Birla Health, Raheja QBE, Edelweiss General Insurance had combined ratios as high as 120 to 150 per cent.

In the first 11 months of FY20, Gross Direct Premium Underwritten was Rs 1.73 lakh crore, a year-on-year growth of 14 per cent compared with Rs 1.52 lakh crore of gross direct premium underwritten for the first 11 months of FY19. The share of public insurers in this has further declined to 44 per cent in these 11 months.

Sanjay Agarwal, director at Care Ratings, lamented that, "even as the insurance premium has increased manifold, the profitability has witnessed a substantial decline. Furthermore, the industry is dependent on its investment portfolio for profitability."

He said, "the industry would have to rein in the tariff collapse and instead offer a better service experience along with product innovation to grow the market.”