Profitability remains a challenge: Hemant Kaul

Penetration of general insurance is bound to grow with increasing awareness

The penetration of general insurance, measured as a percentage of premiums to gross domestic product (GDP), has been low at 0.7 per cent in India. We feel as awareness grows, penetration of general insurance is also bound to grow. India’s GDP has been projected to grow at more than seven per cent for the next several years and as a natural corollary, the general insurance industry is set to grow at the rate of 14- 18 per cent for the next decade. In India while growth is perhaps a certainty, the major challenge is profitability.

Basic accounting would suggest that in the general insurance industry, the total amount paid for claims and the cost of management should be less than the quantum of premium collected. In such a situation, the industry would be making an underwriting profit and have a combined ratio below 100 per cent. Contrary to this ideal situation, the insurance industry has been posting a cumulative combined ratio of over 125 per cent for the last few years. In a nutshell, the claims and management costs have exceeded the total premium collected by 25 per cent. This situation is clearly not sustainable.

What has further aggravated the situation is the crisis emerging out of the Indian motor pool for commercial vehicles, where premiums pertaining to third-party risks collected by all general insurance companies, are ceded to the pool. All claims paid are debited to the motor pool. The resulting losses are shared between the industry players in the proportion to their market share. It may be noted that third-party premium for all vehicles is regulated and insurers have no role in deciding the premium. This has led to inefficiencies in the system. The motor pool, set up in 2007 has thus, been a source of a major systemic risk facing the industry. Back-of-the-envelope calculations indicate total third-party premium collected on commercial vehicles between 2007 and 2010 was Rs 6,800 crore but claims were Rs 8,500 crore till March 2010.

That is a loss of Rs 1700 crore, which the industry absorbed. Moreover for the current financial year, the industry would have to absorb additional losses to the tune of Rs 6,500 crore. Given the size of the general insurance industry, this is a colossal number. To put it in perspective, this additional loss of Rs 6,500 crore will be approximately equal to the amount of cumulative profits of the industry for the last five years. This loss is also equal to nearly 75 per cent of the entire capital deployed by all general insurance companies in India as on September 30, 2011. This clearly is a cause of concern for all.

Fortunately, the regulator has announced dismantling of the pool from April 2012 onwards and introduced a declined pool of third-party risks pertaining to commercial vehicles. This has somewhat mitigated a major systemic risk facing the industry. But, is this enough?

The regulator has been directing all general insurance companies to shift focus from growth to profitability. The need of the hour is to charge a correct premium for the risk that these companies are writing on their books. In pursuit of growth, general insurance companies have undercut each other to a point where it is hurting all the players. A greater underwriting discipline is required. A major shift from growth to growth with profitability, something which we have been pursuing since our inception, is required.

In case the industry continues to lose money, the shareholders may hesitate to put in additional capital.

The policymakers should perhaps consider insisting on a higher solvency ratio for companies having high combined ratio. Such a move will encourage prudent and sustainable growth for the general insurance industry. This will also ensure that shareholders hold to account their managements which are not prudent in the way they chase growth.

Hemant Kaul MD & CEO, Bajaj Allianz General Insurance