Date:02/08/2005 URL: http://www.thehindubusinessline.com/2005/08/02/stories/2005080201950600.htm

Back Huge motor claims may test solvency of pvt insurers — Fresh capitalisation may be needed

C. Shivkumar

A view of the rain-battered street in Mumbai.

Bangalore , Aug 1

WITH mounting claims in the aftermath of the floods in Maharashtra and Gujarat, private sector general insurers may face severe solvency pressures during the current financial year.

Sources said that the claims are expected to lead to a red lined balance sheet for many of the private sector non-life insurers. Most of these claims are from motor vehicle insurance covers.

Private sector companies had since the beginning of operations focussed entirely on the automobile sector, in particular cars and personal transport vehicles, staying away from commercial vehicles and third party liability driven covers. This was because personal transport portfolios were seen as low claims sectors, leading to higher premium retention and consequently high profitability.

However, the floods in the two States have completely altered that situation. Private sector non-life insurers are now deluged by claims, industry sources said. Expectations are that the claims ratios may exceed 100 per cent. Private sector general insurers had so far managed to contain claims ratios to below this level, ensuring the profitability of the portfolio unlike the public sector, where the ratios were over 150 per cent.

But the sources said claims were also expected to pour in from industrial risk covers affected by the floods. They added that these risks included conventional fire policies, which included both floods and tempests. In addition to these covers, the risks covered by the private general insurers also included loss of profit. Industrial risk covers, however, were unlikely to substantially impact the balance sheets, the sources said.

Mr Kamesh Goyal, Chief Executive Officer of Bajaj Allianz General Insurance Company, said, "Industrial claims are not likely to have a big impact on the balance sheets." This was because most of these covers were backed by reinsurance. Reinsurance allowed the primary insurers to cede their liabilities to another insurer for a commission.

Some of these covers were provided through treaties entered into with large international reinsurers or through Facultative covers (reinsurance done on a case-to-case basis).

On the other hand, motor risks have no reinsurance support from either international or domestic reinsurers. In fact, reinsurance is not covered by any pool-backed mechanism. This would therefore imply the private insurers would have to meet the auto insurance claims from their own respective balance sheets. Current estimates on auto insurance claims is in excess of Rs 1,500 crore, almost equal to the combined capital of the private insurers, the sources said.

Such large payouts, the sources said, was likely to significantly weaken their solvency ratios, the sources said. Accordingly, some deterioration in the capital is expected due to the large claims settlements. The sources said even after liquidation of some of the liquid assets and investments for meeting the claims settlements, capital was likely to weaken. This would therefore necessitate fresh capitalisation of the general insurers to sustain the current growth rate in business volumes.