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2012: A forgettable year for insurance sector

Unlike the banking sector, which will soon see the entry of new players, thanks to Parliament approving the Banking Laws (Amendment) Bill, the year was largely a forgettable one for the insurance sector.

Unlike the banking sector, which will soon see the entry of new players, thanks to Parliament approving the Banking Laws (Amendment) Bill, the year was largely a forgettable one for the insurance sector.

The highlight was the government allowing Life Insurance Corporation (LIC) to pick up stakes up to 30% in companies, from the current limit of 10%, in an apparent bid to save its disinvestment programme, which is likely to fall short of the R30,000 crore target. Insurance Regulatory and Development Authority (Irda) opposed this, claiming that such large exposure to individual companies could pose significant risks to LIC.

Irda also expressed concern over any possible negative impact on LIC’s balance sheet from its large annuity payouts. The opposition assumed importance as Moody?s Investors Service had in May downgraded LIC?s foreign currency rating of Baa2 to Baa3 following findings of the company’s balance sheet having a major exposure to domestic sovereign debt vis-a-vis its capitalisation and its lack of revenue resources overseas.

Parliament’s winter session concluded recently without considering the Insurance Laws (Amendment) Bill. The Bill, recently approved by the Cabinet, proposes to hike the foreign investment ceiling to 49% from 26%.

The Bill may now be taken up only in the Budget Session. Had it been approved by Parliament, the legislation could have helped in addressing the sector’s immediate capital constraints. Analysts estimate that the capital intensive sector ? in which a company normally takes around a decade to turn profitable ? needs $10-12 billion in the next five years for expansion.

Investors, including those overseas, are keen on the sector especially considering the dismal penetration so far.

What is worrying the government is that after the de-tariffing, the companies have tried to outdo one another in lowering premiums for consumers to such an extent that it has now started affecting their balance sheets. This has also led to the sector rejecting many genuine claims in a bid to cut the losses, further damaging the prospects.

The combined ratio (which is the claims and operating expenses expressed as a percentage of the total premium income) for four public sector non-life insurers (United India Insurance, Oriental Insurance Co, National Insurance Co and New India Assurance Co) is now down to 120-129% from 136-140% during 2010-11.

Life insurers saw a fall in their premium collections during the year as well.

As per data released by Irda, premiums collected by 23 private sector companies and LIC totalled R53,814.09 crore in the period. The country’s largest life insurer LIC reported a drop of 2.88% in its premium collection, while the decline in private companies was 5.07%.

LIC’s premium collection stood at R40,069.84 crore in April-October as against R41,259 crore in the year-ago period. Private insurers netted R13,744.25 crore against R14,479 crore in the corresponding period of 2011-12.

The finance ministry had noted that so far the insurance sector’s overall profitability was driven by the investment income and that there has been a steady deterioration in the core business of premium underwriting.

P Chidambaram, after taking over as finance minister in August, sought simpler and easily understood products from the industry even as he promised to give tax incentives to life insurance companies and their agents as well as policyholders.

He also wanted Irda to ease investment norms to provide greater flexibility to life insurance companies to invest in infrastructure and debt instruments. This is significant as the infrastructure sector aims to attract a whopping $1 trillion investment during the 2012-17 Plan period. Final guidelines on investments are expected early next year, according to sources.

The year saw new regulations being proposed by the sector regulator, in terms of investment and new product design guidelines. Irda is soon set to announce new guidelines on designing traditional life insurance products, bringing them on the same playing field as the unit-linked insurance plans (ULIPs). ULIPs which were once contributing to almost 80% of the total business for insurers, had suffered a huge beating when the regulator decided to cap distributor pay on them in 2010. Since then, insurers have been trying to adapt to increase their traditional insurance product business thereby making them more attractive to distributors as well as customers.

Another issue which got coverage during the year was the losses of the insurance companies on account of motor vehicle insurance, which accounts for around 40% share in the non-life insurance segment.

It is estimated that the four public sector general insurance companies alone could suffer over R2,000 crore worth losses from motor vehicle insurance this financial year, with claims far in excess of the income from premium owing to the large number of accidents in the country.

This segment also suffers from unlimited liability, regulated tariff and no restriction on jurisdiction for filing claims. There were demands for a separate legislation for insurance compensation in case of motor accidents, raising the motor third-party premium and fixing the claim limit.

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First published on: 27-12-2012 at 00:50 IST
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