GIC, NIA ratings downgraded by AM Best

At a time when the general insurance industry is heading towards lifting of price controls from insurance products "" the country's only state-owned reinsurer, General Insurance Corporation of India (GIC) and state-owned New India Assurance Company (NIA) "" have received downgraded financial strength rating and a negative outlook from AM Best Company, the world's leading provider of ratings for the insurance industry.

AM Best Company has downgraded financial strength rating to "A-" (Excellent) from "A" (Excellent) and the issuer credit rating to "A-" from "A" and has also changed its outlook from stable to negative for both GIC and NIA.

The general insurance industry will be detariffed from January next year and the reinsurer as well as the insurance companies are expected to be financially sound to face the fall in premiums as a result of competition between insurers.

AM Best, in two separate releases, has said that it views GIC's and NIA's combined ratios in most business lines as very high and believes that profits will remain entirely reliant on investment returns.

Best indicated that high proportion of equity (50 per cent for GIC and 54 per cent for NIA) held in the domestic market, maintains their risk-adjusted capital position under pressure.

Says an insurance official, "With detariffing the prices will fall and underwriting profits will be marginal or non-existent. Besides acquisition costs are increasing. Companies are dangerously relying on investment income to survive. What will happen if the capital market becomes less buoyant?"

Going forward, the motor third party liability pool is likely to have a positive, albeit limited, impact on GIC's performance. GIC's investment returns (including gains) have been strong due to the booming domestic stock market.

"In AM Best's opinion, GIC's leading position in the domestic market is likely to be maintained over the next two years, as compulsory cessions in the Indian market (the company's main source of premium income) are expected to continue in the near future. However, the company will continue to face increasingly challenging competition from the international reinsurers for the non-compulsory business. GIC is expanding internationally, and at year-end March 2006, 22 per cent of its overall business derived from its overseas operations.

AM Best believes that NIA's combined ratio is likely to remain high despite the expected positive impact from the creation of the motor third party liability pool in January 2007 (New India posted a combined ratio of 126.9 per cent in March 2006).