COVID-19 impact: Life insurers may need to shore up provisions in FY22

Listed insurance companies have provided for additional provisions in the wake of rising COVID-19 cases. This could be hiked further, leading to an impact on their embedded value.

Niraj Shah, Chief Financial Officer, HDFC Life, told Moneycontrol that, in FY21, the company settled over 2.9 lakh death claims, resulting in a payout of over Rs 3,000 crore.

“We will continue to follow a calibrated pricing and underwriting approach to new business in FY22. We have set aside an additional mortality reserve of Rs 165 crore, based on our experience in FY21 and emerging mortality trends across business and customer segments. Our approach would be to review the adequacy of this reserve at periodic intervals," he said.

There are also fears of a third wave of COVID-19 and it impacting adults and children.

However, Shah said that at a broader level, HDFC Life will monitor overall mortality claims in excess of their estimates, rather than segregating claims based on the cause of death.

The MOFSL report said that most insurers reported a higher claim experience in FY21 and have made provisions to absorb potential claims that may arise in the wake of a more devastating COVID 2.0.

“The claim experience is thus likely to stay adverse over the next couple of quarters, all the more due to delays in the reporting of claims. The stringent actions announced by several state governments have helped lower the infection count and the pickup in vaccination rates may prevent another wave of this magnitude. Despite this, claims in H1FY22 may easily surpass the total claims seen in FY21," the report said.

Moneycontrol had reported earlier how there is a mismatch between actual deaths and insurance claims. At present, insurance claims (for death) are only 10 per cent of the reported COVID-19 death numbers. COVID-19 claims close to Rs 2,400 crore have been paid out by life insurers as of May 15.

Satyan Jambunathan, Chief Financial Officer, ICICI Prudential Life Insurance, told Moneycontrol that with infection rates dropping and vaccination rates increasing, the company is hopeful the death toll might reduce in the second half of FY22.

“Based on our estimates, we have already provided an additional provision of Rs 330 crore for COVID-19-related death claims, which is 1.5 times what we incurred in FY21. We are keeping a careful eye on this scenario. If we observe that the emerging claims situation deviates from our expectations, we will change the provisions accordingly,” he added.

All the three big life insurers have made provisions towards COVID claims. While HDFC Life made provisions of Rs 165 crore, SBI Life has provided for Rs 183 crore and ICICI Prudential Life Insurance Rs 330 crore.

SBI Life did not respond to a query from Moneycontrol.

While MOFSL said that provisioning may rise with a hike in fatalities, the report added that there wouldn't be any material impact on the balance sheet.

"Given the sharp rise in fatality rates, the insurers would need to shore up their provisioning buffers. However, this does not, as such, pose any material risk to the balance sheet, solvency ratios, in our view," said MOFSL.

Solvency ratio is set at 150 per cent for all insurance companies. This is roughly the ratio of assets to liabilities. All listed insurers have maintained a higher-than-required level of solvency at all times.

For HDFC Life, solvency stood at 201 per cent as of March 31, 2021. At SBI Life, solvency was 215 per cent, while for ICICI Prudential Life, it was at 216.8 per cent.