IRDA’s premium hike to improve general insurers underwriting: CRISIL

CRISIL expects the recent rate hike in third-party (TP) motor insurance premiums by Insurance Regulatory Development Authority of India (IRDA) to improve the underwriting performance of the Indian general insurance industry in 2011-12 (refers to financial year, April 1 to March 31). The rate hike is expected to significantly improve the general insurance industry’s combined ratio to around 110 per cent in 2011-12 from an estimated 132 per cent in 2010-11 (a high combined ratio indicates weak underwriting performance. In other words, a combined ratio of more than 100 per cent indicates underwriting losses).



Ms. Rupali Shanker, Head – CRISIL Ratings Says "We view the rate hike in the TP motor insurance segment as an important step towards containing the general insurance industry’s mounting underwriting losses. We expect the industry’s combined ratio to improve to 110 per cent in 2011-12 on the back of this rate revision".



CRISIL Risk Solutions provides comprehensive risk management services to banks, financial institutions, and corporate across all areas of risk including: credit, market and operational. In addition to providing innovative software products, Ranked as the No. 1 Risk Solution provider in the last Indian Banks' Association (IBA) insight media survey. Bank risk management services by Crisil, delivered risk solutions to about 50 banks and financial institutions in India and abroad and has largest user base of more than 100000 users. CRS's flagship product RAM is the largest deployed internal risk rating solution in India.



However, the TP motor insurance segment is marked by unlimited liability and numerous instances of inflated and fraudulent claims. CRISIL believes that this rate hike is inadequate to cover the substantial losses incurred in this segment; premium rates need to more than double from the 2010-11 levels for the industry to make underwriting profits in this segment. In addition, the underwriting performances of the other segments continue to be weak. Mr. Pawan Agrawal – Director, CRISIL Ratings, says, "We estimate the industry’s underwriting losses to increase significantly to more than Rs.100 billion in 2010-11 from Rs.59 billion in 2009-10. This increase reflects weak underwriting performance, increase in reserving requirements for each of the past four years on the TP motor insurance pool, and wage revisions in public-sector insurance companies".



Given the mounting underwriting losses, CRISIL believes the general insurance industry needs to take urgent steps to improve underwriting performance across segments. Instilling underwriting discipline in the health insurance segment (111 per cent claims ratio for 2009-10) is particularly critical, as this segment is expected to drive the general insurance industry’s growth over the medium term. Mr. Agrawal Adds, "Prudent underwriting practices marked by risk-based pricing across key segments, effective claims management, and lower operating expenses remain imperative to further improvement in the general insurance industry’s overall underwriting performance".



CRISIL will continue to monitor the impact of the rate hikes and additional provisioning requirements on the underwriting performance of its rated entities. The credit risk profiles of CRISIL-rated general insurance companies continue to benefit from their established track record and expectation of strong support from their owners (Government of India for public-sector insurers and parent companies for private-sector insurers).