The Centre has been pumping in a huge amount of capital into ailing public sector banks in recent years. With the financial performance of public general insurers also deteriorating sharply over the past few years, the Centre has decided to offer a lending hand to them as well.

The Union Cabinet has approved capital infusion of ₹12,450 crore into three public sector general insurance companies — Oriental Insurance Company OICL (OICL), National Insurance Company Ltd (NICL) and United India Insurance Company Ltd (UIICL). The New India Assurance — the fourth PSU general insurer — is a listed entity that came out with an IPO in 2017.

While all the PSU general insurers have seen a significant drop in market share over the past three years, OICL, NICL and UIICL have, in particular, seen a significant deterioration in their financial performance.

For instance, National Insurance reported sizeable losses in the past three fiscals (up to December 2019) and has seen its solvency ratio drop to 1.04 times in FY19 and further to 0.12 times in the nine months ended December 2019, as per the latest available public disclosure. IRDAI mandates a minimum of 1.5 times solvency ratio for insurers. The solvency ratio is a critical metric for an insurance company. Essentially, it is the size of the insurance company’s capital in relation to the risk it takes — assets minus liabilities. It measures how financially sound an insurer is and its ability to settle claims.

United India has also reported huge losses in the past two years and its solvency ratio as of December 2019 stood at 0.94 times. The insurer has also seen a substantial fall in market share — to 9.16 per cent (of total industry gross direct premium income) in FY20 from 11.6 per cent in FY18. Oriental has a solvency ratio just above the IRDAI mandated requirement of 1.5 times as of December 2019.

While the performance of the only listed PSU player — New India Assurance — is on a better footing, falling market share over the past three years and weak earnings profile (in relation to private player ICICI Lombard) remain key concerns.

Challenging market

While the government had earlier planned to merge the three PSU general insurers and subsequently list them, it has now ceased the process and instead decided to bolster the capital and solvency positions of these entities.

This is a welcome move, as these companies have been steadily losing market share and seen deterioration in their financial metrics. Aside from the intense competition from private players, the slew of regulatory changes in the past two years in the motor insurance segment, and large losses in the crop insurance business, have plagued PSU general insurers.

For instance, the mandatory long-term third-party insurance that had kicked in in September 2018 had led to intense price competition in the own damage motor business, leading to a fall in overall premiums in the industry and increase in claims/loss ratio in FY20 (claims ratio is the ratio of claims incurred to net earned premium). Weak auto volumes, had also impacted the business.

Private players such as ICICI Lombard took a conscious call to exit the crop insurance business owing to huge losses in the business. But PSU insurers continued to have significant exposure to this business in FY20.

Two ratios — loss and combined ratio — are used to measure the profitability of an insurance business. While the loss ratio is total incurred losses in relation to the total premiums, the combined ratio measures the incurred losses and expenses in relation to the total premiums.

The combined ratio for National Insurance has been high at over 145 per cent, leading to losses over the past three years. For Oriental and Untied, too, the combined ratio has shot up significantly over the past three years to hit 135-137 per cent as of December 2019.

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