The Centre’s Pradhan Mantri Fasal Bima Yojana scheme, which added spunk to private insurers’ performance in 2016-17, was expected to cause them some pain in 2017-18, owing to the higher crop losses in 2017-18. ICICI Lombard’s March quarter results has more or less played to the script.

Crop losses

Despite higher losses in crop and motor third-party insurance, ICICI Lombard has delivered a sound performance in 2017-18, thanks to healthy growth in premium and an overall lower loss ratio (ratio of claims incurred to net earned premium) vis-à-vis 2016-17.

Given the lower claims ratio in crops due to normal monsoon in 2016-17, an adverse movement in claims in 2017-18 was in any case expected to impact insurers’ profitability. For ICICI Lombard, too, adverse loss experience in kharif crops has been a dampener.

Loss ratio – essentially total incurred losses in relation to the total premiums for crop – increased from 84 per cent in 2016-17 to 135 per cent in 2017-18. In motor third-party insurance, too, losses increased from 97 per cent to 107 per cent in 2017-18.

However, lower losses in other segments such as motor own damage, health, fire and marine, have helped more than offset the pain in crop and motor third-party, leading to an overall reduction in the loss ratio for 2017-18 to 76.9 per cent from 80.4 per cent in 2016-17.

Led by lower loss ratio, the combined ratio – the incurred losses and expenses in relation to the total premiums – has fallen from 104 per cent in 2016-17 to 100 per cent in 2017-18. This has been in line with the stated objective of the company at the time of the IPO, bringing down the combined ratio to 100 per cent levels.

Aside from the loss and combined ratios, profitability is also dependent on float management. The economics of a non-life business principally rides on the concept of ‘float’, where insurance companies collect premium upfront and pay claims afterwards. This creates a float or investable asset base that can be deployed to generate returns for shareholders. ICICI Lombard has one the largest investment books among private players (at ₹18,193 crore as of March 2018). The realised return has been steady at around 10 per cent over the past three years.

After the sharp growth of 32.6 per cent in gross direct premium income (GDPI) in 2016-17, thanks to crop insurance, the company has delivered 15 per cent growth in 2017-18. Based on the numbers declared by the IRDAI, the overall growth in premiums among private insurers is higher at 21 per cent. A conscious call to cap exposure to the mass health segment, which remains a lumpy business and crop where the underwriting risk remains uncertain, could possibly have led to a relatively lower growth.

On the other hand, the company’s selective approach in underwriting, helps focus on more profitable businesses and cap losses, which augurs well for earnings in the long run.

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