Non-life insurers told to check expense ratio

MOVE AIMS AT ENSURING COS' ABILITY TO PAY CLAIMS TO POLICYHOLDERS DURING SLOWDOWN

 THE insurance regulator has directed a clutch of non-life companies, including Royal Sundaram Alliance Insurance, HDFC Ergo General Insurance, Reliance General Insurance Company and Tata AIG General Insurance, to rein in their expense ratio, a senior official said .
    The Insurance Regulatory Development Authority's (IRDA) move is meant to ensure that these companies have the ability to pay claims to policyholders even when there is a slowdown in new business growth.
    Expense ratio, in insurance parlance, is the proportion of premium used to pay all the costs of acquiring, writing and servicing insurance and reinsurance. "Non-life insurers need to keep a check on their expense ratio to ensure that solvency is not jeopardised at any time," said R Kannan, member actuary, IRDA.
    The regulator's concerns need to be viewed against the backdrop of a slowdown in business growth. The total premium income from non-life business grew by around 9% to Rs 30,601crore in FY09 compared with Rs 28,051 crore in FY08. Premium income is expected to grow at fast pace only when the economy turns around.
    As per insurance regulation norms, non-life insurance firms are required to maintain management expenses to premium ratio of 20%. The industry average is 20-26%. But some of these companies have breached the average, said an official.
    The regulator took a lenient view
    of this issue in the past, as companies argued that they were in a start-up phase. Some insurers have low expense ratios due to economies of scale. They can leverage spends on advertising and brands that attract customers, say experts.
    The IRDA is concerned as a high expense ratio could impact the solvency — the ability to pay a claim — of an insurer.
    The bottom line of non-life companies has been hit due to the price war that has seen premium rates come down by as much as 80% in some businesses.
    "The IRDA's priority is to ensure health of an insurance company. The regulator cannot ask companies to increase rates or reduce claim payments and therefore, the obvious solution is to ask them to prune," said an industry official.
    Sources said that the regulator has been turning down proposals on granting liberal remuneration packages to new CEOs. Now, given the surge in costs, the regulator is also likely to propose a freeze on the salaries of incumbent CEOs. "The regulator appears to be taking a clue from global events, where regulators are looking at the health of insurance companies," said an industry official. FOR THE PEOPLE
Expense ratio is the proportion of premium used to pay all the costs of acquiring, writing and servicing insurance and reinsurance IRDA is concerned as high expense ratio could impact the solvency, the ability to pay a claim, of an insurer

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