Free pricing helps pvt non-life cos play catch up

Aggressive Price Cuts, Tie-Ups With Dealers Help Private Cos Gain 50% Share Of Motor Insurance Market In '07-08

PRIVATE non-life insurance companies have increased their share of motor insurance, following introduction of free pricing. Private insurers' share of premium from comprehensive insurance of vehicles is 50% for 2007-08 against 41% a year ago.
    According to data released by insurance regulator Insurance Regulatory and Development Authority (IRDA), private life insurance companies generated a premium of Rs 4,061 crore from sales of motor insurance cover for 'own damage'. Own damage or comprehensive cover refers to that part of motor insurance that is voluntary and covers the risk of damage to the vehicle. A year ago, private companies had written only Rs 3,115 crore from this segment. Private insurers have been able to wrest market share from state-owned companies because of aggressive price cuts and tie-ups with automobile dealers.
    Among private companies, growth in this segment was driven by Reliance General Insurance and Bajaj Allianz both companies increased their motor own damage portfolio by 124% and 50%, respectively. Interestingly, largest private life insurer ICICI Lombard went slow in motor and its own damage portfolio actually shrunk 5%.
    Interestingly, it is not just the profitable own damage segment that private companies have increased market share. Private companies have made inroads into the compulsory third-party liability portfolio as well. Until a couple of years ago, private companies were shunning the third-party liability covers, as rates on this were frozen and claims ratio were too high. However, following revision of the rates in 2006, private companies have slowly increased market share in this segment as well. In 2006-07, private companies wrote third-party business amounting to Rs 1,528 crore which is two-and-a-half times of the Rs 596-crore business they did in 2006-07. The market share of private companies in this segment has gone up to 33% from 19% a year earlier.
    Private companies have been able to increase their market share in motor insurance, to a much larger extent than they could increase overall market share. Overall private companies accounted for 40% of total business of Rs 28,126 crore in 2007-08, up from their market share of 35% of the total business of Rs 24,998 crore in 2006-07.
    Motor and health insurance have been the drivers of growth in 2007-08. Property insurance has seen negative growth on account of detariffing which has resulted in fire insurance premium for the industry declining to Rs 3,516 crore from Rs 4,157 crore a year ago. ICICI Lombard and Tata AIG have been the only two companies to have increased their premium from fire insurance in 2007-08.

Insurers set to take a big mark-to-market knock

IRDA Queers The Pitch

Mayur Shetty MUMBAI

THE life insurance industry stands to lose several hundred crores this year on account of the rise in interest rates. A recent directive from the insurance regulator, IRDA, requires companies to mark-to-market all investments made from their technical reserves in government securities.
    Besides the policyholders' funds that they invest, insurance companies invest in government securities the money they bring in to meet minimum net worth requirements. Until last year, these securities were valued at their acquisition price and insurers were required to mark-to-market only securities purchased from policyholders' funds. Since most of the policyholders' funds come from sales of unit-linked policies, the loss in the value of securities bought from policyholders' funds is reflected in the lower net asset value of the schemes and does not affect the company's own profits.
    But with the new guidelines, the balance sheets of life insurance companies are set to take a hit as well. Life insurance companies have brought in several thousand crores to meet the solvency margin requirements. These solvency margins prescribe the minimum net worth that a company is required to maintain in relation to its overall business and is somewhat similar to the capital adequacy ratio for banks.
    A portion of this net-owned funds is invested in government securities, which have fallen sharply in value because of the rise in interest rates. Insurers seek MTM norms similar to banks'
    "EVENa start-up company, which has a paid up capital of Rs 100 crore would have Rs 60-70 crore invested in government securities. The value of these securities would have fallen by Rs 6-10 crore in the last quarter and would have to be booked as provisions for depreciation and would add to the losses," said an industry official. He added that losses would be much higher in the range of Rs 20-80 crore for larger players.
    The insurance companies are likely to make a representation to IRDA that the valuation guidelines be brought in line with the valuation guidelines issued by the Reserve Bank of India. The banking regulator allows banks to classify their investment in government securities in three categories — 'held-to-maturity', 'available for trading' and 'available for sale'. Banks have taken advantage of this dispensation and classified most of their government securities holdings in the held-to-maturity (HTM) category. Once securities are transferred into the HTM category, no further provisions for depreciation are required. But they can only transfer the securities into the HTM category at market value, ie after booking a loss. Anticipating sharply lower profits because of this provision, banking stocks have been hammered in the capital markets.
    mayur.shetty@timesgroup.com