''De-tariffing'' to increase insurers'' underwriting losses: CRISIL

Non-life insurers' underwriting losses will increase after 'de-tariffing', according to a CRISIL study of 12 public and private sector non-life insurance companies. The study reveals that a projected 10 per cent reduction in fire, engineering, and motor own damage premia, accompanied by a 20-per cent increase in motor third-party (motor TP) premia, will result in the industry's underwriting losses increasing by 17 per cent.

Nevertheless, the strong capitalisation of India's large general insurance companies will continue to support their business and financial profiles in a 'de-tariffed' regime.

With effect from December 31, 2006, the general insurance industry in India is expected to be 'de-tariffed', giving insurance companies the freedom to decide their premium rates. CRISIL believes that this is likely to increase competition in profitable business segments such as fire and engineering, translating into lower premia. In contrast, returns from severely loss-making segments, such as motor TP insurance, are likely to improve to some extent, as industry players raise premium rates to cover expected claims.

According to Krishnan Sitaraman, head, financial sector ratings, CRISIL, "Underwriting losses will increase immediately after 'de-tariffing', as the benefit from the increase in motor TP premia will be insufficient to offset the impact of the reduction of premium levels in profitable segments." CRISIL therefore expects the core business operations of industry players to remain unprofitable over the medium term.

The financial profiles of domestic public sector non-life insurance companies are, however, unlikely to be materially affected, despite continued underwriting losses in a 'de-tariffed' scenario.
This is because these companies have robust capitalisation levels and large reserves from un-booked profits on investments.

echnical reserves are significantly high for the four largest players in the sector, all of which are government-owned. Of these, National Insurance Company Limited, New India Assurance Limited, and Oriental Insurance Limited, have financial strength ratings of 'AAA/Stable' from CRISIL.

Strong capitalisation levels will enable these companies to comfortably meet ongoing claims, and service unexpected losses, over the medium term; this will hold true even if underwriting losses increase. For private sector entities, given their relatively short track record and lower current profit levels, access to continued capital infusion will be key to maintaining financial strength in a 'de-tariffed' scenario.