Underwriting losses as warned by Ministry of Finance

Recently in a letter to the chiefs of PSU non-life insurers by the Department of Financial Services, it was mentioned that “It has been brought to the notice of this department that the public sector general insurance companies (PSGIC) are violating government advisories leading to huge underwriting losses. As a result, these companies are solely dependent upon the investment income (profit from sale of investment). These are limited investments and are fast depleting as a result of indiscriminate disposal by the companies to make up for the losses on underwriting premiums. Such an arrangement is not sustainable in the long run and has the capacity to permanently harm the competitiveness of the public sector insurers,” the DFS letter said. According to the Insurance Regulatory Authority of India (IRDAI), the underwriting losses of the non-life insurance companies increased to Rs 14,962 crores in 2015-16, from Rs 10,576 crores in the previous year. The underwriting losses increased by 41.47 % over previous year, it said. IRDA is yet to come out with losses for fiscal 2016-17. The DFS letter cited one case of violation of advisory/ internal circulars on health insurance stating that “clarification has been called from a PSGIC and disciplinary action is also contemplated”. “It may be noted that an appropriate pricing mechanism for pricing group health insurance should take into account the existing incurred claims ratio (ICR), management expenses, medical inflation, commissions, likely increase in quantum of claims due to ageing of covered group, increase in size of group, cost of underwriting of business and other associated factors.” “Thus, in order to protect the interests of the policy holders, ensure that the PSGICs continue to be effective players in the market for provision insurance services on a long-term basis and ensure that unhealthy underwriting practices in these companies do not cause unnecessary financial strain on their financial stability, it’s desirable that prudent underwriting practices suggested in government advisories are followed strictly,” the DFS letter to insurance CMDs said. On the high underwriting losses, KK Srinivasan, Former Member, IRDAI, said, “the excuse of some PSU Insurers that private sector insurers are also making underwriting losses is flimsy. The proportion of underwriting loss to total premium written in PSU insurers is alarming. For example, the total premium of New India, the largest non-life PSU, is only double that of ICICI Lombard the largest private sector non-life insurer, but its underwriting loss is over seven times that of ICICI Lombard.” “It is high time that the government moved in and punish PSUs which are indulging in reckless sale of investment assets to cover up their underwriting losses before it is too late,” Srinivasan said.

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