High expectations raise risk for stocks of general insurance companies

Benefits of lower claims could get offset by subdued premium collection and fixed costs

General insurance companies have bounced back sharply on the bourses recently. ICICI Lombard General Insurance Company (ICICI Lombard) and New India Assurance Company (New India) have seen 37-50 per cent surge in their share prices since March 24, outperforming the 15 per cent rise in the BSE Sensex during the same period.

Expectations of strong demand for health insurance products amid coronavirus outbreak and higher profitability aided by lower claims is driving up investor sentiment. However, investors may have to tone down their profitability expectations, given concerns over premium collections and costs.

Avinash Singh, analyst at SBICAP Securities, says, “Claims would come down in the near term with restricted public mobility and transportation. However, the overall combined ratio (profitability measure for general insurers) in FY21 may not see strong improvement due to fixed costs, while premium growth too would remain weak.”

Besides the lockdown impact (as reflected in a 11 per cent year-on-year fall in gross direct premium in March), subdued demand for automobiles is a key concern for general insurers. The automobile sector accounts for over 35-40 per cent of total general insurance premium.

Atul Sahai, chairman and managing director of New India Assurance, says, “Motor segment would see growth pressure in the ensuing quarters in terms of new business as well as renewals.” New vehicle sales yield around 15 per cent new business to general insurers, say experts. Post lockdown, growth for the motor insurance segment would also get restricted as the IRDAI (Insurance Regulatory and Development authority of India) has deferred price hikes for now.

Although a strong impetus to health insurance business is not ruled out over the long term, many experts and analysts believe that a sharp uptick in premium income is unlikely at least in the next 6-9 months due to likely lower demand. Also, it is still not clear as to how the liquidity crunch (cashflow pressures) at medium and small businesses impacts demand for other general insurance segments such as fire.

There is also some scepticism on renewal of existing policies. While the government and the regulator (IRDAI) have extended the renewal time (for premiums due till 15 May) amid coronavirus, customers may demand more time, says Sahai.

Thus, management commentary during March 2020 quarter earnings on demand, loss ratio and renewals would be closely watched.