State-owned insurers face Irdai's litmus test before IPO

Irdai has barred National Insurance's actuary for 'overstating profits and distorting solvency'

The government’s plan to list all the public sector general insurance companies in 2017-18 (FY18) is likely to face hurdles after the Insurance Regulatory and Development Authority of India (Irdai) barred the actuary of the country’s second-largest general insurance company, National Insurance Company, for supposedly understating claims by more than Rs 4,000 crore.

According to Irdai’s circular, the ‘Incurred But Not Reported Claims Reserves’ (IBNRs), estimated by Manalur Sandilya, have gravely imperilled the financial position of the insurer and resulted in overstating the insurer’s profits and its premature distribution, endangered the payment of benefits to policyholders, and distorted the solvency position of the insurer.

“This preposterous approach adopted by the actuary not only tends to justify his erroneous method, but also reveals that there could be a situation arising when the insurer may have to encash its equity investments,” the circular said.

National Insurance officials were not available for comment.

IBNRs are the amount that an insurer owes policyholders who have bought policies as cover for losses but have not claimed them. Since the insurer does not know the amount of claims that can arise from these policies, IBNRs are an estimate.  

The regulator, consequently, has barred the actuary from reviewing reports for another state-owned general insurer, United India Insurance. It also terminated the appointment of the actuary as mentor to the appointed actuary and said that any other work of the actuary would not be recognised for two years. 

Both these insurers are expected to go for their initial public offer (IPO) this financial year. 

Insurance experts say Irdai’s decision would make investors wary and they would look more closely at the financials. “Once the IBNR is restated, it will impact the solvency ratio of the insurance company,” said the head of an insurer. 

According to Irdai guidelines, insurance companies need to have solvency of 1.5 per cent to conduct normal business.

According to experts, this would require the insurance company to recast its balance sheet and get it approved by Irdai before it can go for the initial public offer (IPO). The process could take longer because some recasting of the balance sheet will need to be done now. 

“Even if National Insurance comes up with fresh numbers, both Irdai and the market regulator, the Securities and Exchange Board of India, will take a careful look at the numbers. Also, investor confidence in the numbers will also be adversely impacted,” said Abizer Diwanji, leader, banking and financial services, EY.

The submission made by the actuary supposedly understated claims worth Rs 4,263 crore, thereby declaring the company made profits of Rs 150 crore. 

In January, the government had approved the market listing of all five government-owned general insurance companies, namely New India Assurance, United India Insurance, Oriental Insurance, National Insurance, and General Insurance Corporation of India (GIC Re). The IPO will be through the issue of new shares or selling existing shares through the offer-for-sale route.