The Hindu Business Line : Fears of imminent US attack on Iraq — Pvt insurers to face more solvency pressures

Sources said here that the companies were already faced with severe solvency pressures with the possibility of mounting liabilities and depreciation in investments. Under present guidelines of the Insurance Regulatory and Development Authority (IRDA), for maintaining the solvency margins, the value of the assets should be more than the estimated liabilities of the insurers.

Till last year, most of the private sector insurers had taken recourse to reinsurance facilities both with the national reinsurer GIC and foreign reinsurers to restrict liabilities. But for the next year primary insurers both public and private sector are yet to finalise their reinsurance treaties. The delay in finalisation of the arrangements is because the foreign insurers are still in the process of working out the probable maximum loss (PML) ratio. The PML ratios have already been reworked after September 11 (terrorist attacks in the US) and a further upward revision is inevitable, the sources said. This automatically implied that reinsurance markets are poised to harden further from the current levels. And companies such as Allianze AG, the world's largest general insurance company and also joint venture partner in Bajaj Allianz Insurance Company Ltd, have communicated that the tightening would be driven by the increased risks perception.

Once these ratios and premiums have been worked treaties would be finalised, the sources added. But even then the treaties are likely to be extremely restrictive with high premiums. Restrictions in the form of risk covers, new liability caps and additional riders are to be built into the treaties with the insurers. Consequently, most of the private sector insurers would be mostly in the Facultative Reinsurance (Fac Re) markets. Fac Re is provided on a spot basis, based on individual risks. Consequently, premiums are high in such products. Currently Fac Re premia for plain vanilla covers are in the range of 1.75-2 per cent of the sum assured.

This hardening of the reinsurance markets has raised the liabilities of the primary insurers, since they would be expected to absorb more risks into the balance sheets. But the sources said that the absorbing such liabilities were leading to solvency pressures due to the falling prices of insurers investments. Most of the new general insurance companies have only low-coupon securities in their portfolios, compared to the public sector. Since the yields have weakened to about 6.6 per cent for ten-year paper, from a peak of 5.8 per cent, it would mean a substantial weakening in the solvency margins, the sources said.

The sources said that to absorb more risks directly into their balance sheets, insurers have been attempting to recapitalise. However, the sources added that despite the possibility of a relaxation in norms to 49 per cent for foreign companies, few are expected to immediately rush for hiking stakes in their domestic ventures, unless their parent company's underwriting liabilities and investment losses are fully recovered.

Almost all the parents of Indian companies have suffered large underwriting and investment losses after September 11, 2001.

" Unless the impact of this war is completely evaluated, I do not believe recapitalisation is going to be an immediate priority," the sources said.

As a result, to function within the existing solvency margins, private sector insurers have begun scouting for coinsurance arrangements amongst themselves and the public sector.

Some deals, which include Independent Power Project covers have already been concluded.

But even this option, the sources admitted would at best be a temporary reprieve, till such time the asset values appreciate or additional capitalisation takes place.

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