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Strong Investment income help Indian general insurers report profits despite underwriting losses-Crisil

November 18, 2009: Strong investment returns continue to help India’s general insurance companies offset underwriting losses, and allow them to report overall profitability. The underwriting performance of general insurance companies in India remains dismal: most players are yet to report underwriting profits.

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 Rs.50 billion in 2008-09 (refers to financial year, April 1 to March 31) from Rs.25.6 billion in 2006-07. In the wake of de-tariffing, insurers 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 per cent in 2008-09.

This is likely to improve: says Pawan Agrawal, Director, CRISIL Ratings, “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.”

Despite the significant underwriting losses, general insurance companies have been profitable on account of their strong investment returns; the industry’s overall profits were estimated at Rs.5.5 billion for 2008-09. The dependence on income from investments can, however, lead to volatility in profits.

CRISIL’s analysis of the investment returns of public and large private sector insurers reveals that the composition of the investment income has changed over time, with a steady shift from interest or dividend income 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, falling stock prices substantially constrained investment returns of general insurance companies in 2008-09; the profitability of the sector declined by more than 50 per cent in 2008-09 compared with the previous year’s level. To report sustainable profits, general insurance companies will need to generate income on their underwriting operations, instead of depending on investment returns.

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. Says Tarun Bhatia, Head, CRISIL Ratings “Expected support from, and strategic importance to, the Government of India, the sole owner of these companies, along with the returns that the companies are expected to generate from their investment holdings, will support their strong credit profiles.”

“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,” adds Mr. Bhatia.

(Source: Crisil Release)

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