Higher provisioning to increase insurers' losses by Rs 65bn

Regulatory changes are structurally positive for general insurance sector in the long term, says CRISIL

CRISIL believes that the latest regulatory developments in the motor third-party (TP) segment are likely to pose challenges for the general insurance industry in the near to medium term, but are structurally positive for the sector over the long term. In March 2012, Insurance Regulatory Development Authority of India (IRDA) increased provisioning rates for the motor TP pool segment. The additional provisioning of Rs.65 billion that this hike will necessitate will weaken the insurance industry's underwriting performance in the interim. However, CRISIL expects the annual hike in premium rates for the motor TP segment to benefit the industry over the long term. Consequently, the underwriting losses in motor TP segment, which has the most adverse claims performance, are likely to reduce over time. The second round of provisioning increase announced by IRDA in March 2012 takes into account the motor TP segment's consistently adverse performance on claims, and is for each of the five years between 2007-08 and 2011-12. Says Ms. Rupali Shanker, Director – CRISIL Ratings, "We estimate the additional provisioning at Rs.65 billion this time—more than twice the provisioning increase that followed IRDA's rate hike of March 2011." While the additional provisioning for 2007-08 and 2008-09 has to be absorbed in 2011-12, IRDA has allowed companies to apportion the additional provisioning for the remaining years over three years, beginning 2011-12. Adds Ms. Shanker, "The additional provisioning in the motor TP pool segment, and the already high claims in the motor TP and health insurance segments may impact the industry's underwriting performance in the interim. We expect the industry's overall underwriting losses to exceed Rs.100 billion each in 2011-12 and 2012-13." Motor TP, the only segment that has regulated tariffs, accounts for nearly a third of the insurance industry's overall claims. To address the issue of adverse claims performance, IRDA announced annual rate hikes in motor TP in April 2011 and again, in March 2012. The latest revision hikes premium rates for private vehicles by 5 to 8 per cent (10 per cent in April 2011) and those for commercial vehicles by 10 to 30 per cent (68 per cent in 2011), with effect from April 1, 2012. Adds Mr. Nagarajan Narasimhan, Senior Director – CRISIL Ratings, "We believe the annual hike for the motor TP segment is a positive step, and will help check the industry's mounting underwriting losses in this segment. While the current level of premium rate hike is inadequate to completely offset the significant losses in motor TP, we believe that underwriting losses in this segment will reduce over the long term on the back of IRDA's annual premium rate hike". Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release. The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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