Oriental To United India, What's Wrong With State-Run General Insurers

Three of India's oldest government-owned general insurance companies are staring at low solvency levels and poor financial health, forcing the regulator to step in.

The government-backed general insurance companies—Oriental Insurance Co., National Insurance Co. and United India Insurance Co.—which make up for around 20% of market share, have been unprofitable. That's caused their solvency levels—or the proportion of assets they hold against liabilities—to fall significantly below the minimum requirement, forcing the regulator to intervene.

The regulator has asked the government to "act with forbearance" and "under its advice", Debashish Panda, chairman of IRDAI; and TL Alamelu, member non-life at IRDAI, said in response to BloombergQuint's queries at a press conference held on Thursday.

"The companies have been asked to submit revised business plans and the fund infusion by the government will depend on compliance and milestone achievements, as decided by the regulator with the government," the regulator said.

All non-life insurers are mandated to maintain a solvency margin of 150%, according to the Insurance Regulatory and Development Authority (Assets, Liabilities, and Solvency Margin of Insurers) Rules, 2000.

The only listed public sector general insurer, New India Assurance Co., has a comfortable financial ratio, including solvency ratio, of over 150%.

While the regulator said "calibrated moves" are in place to deal with the situation, it did not provide guidance on timelines, milestones and the quantum of fund infusion required to bring the companies back to a healthy state. There is also no clarity with regards to listing, consolidation or sale plans for any of the entities.

The regulator declined to answer on any move to consolidate or merge the three government insurers. "It is up to the government to decide," said Panda.

In 2018, during the budget speech, the Finance Minister had announced the government’s intent to merge these three public sector general insurance companies. The government had subsequently decided to infuse capital, focus on their growth, and not to proceed with the merger, said the Minister of State for Finance in February, as part of a response to a question in the Lok Sabha.

The state-run Oriental Insurance was recently advised to infuse Rs 1,200 crore via a rights issue under the government's recapitalisation plan to improve solvency ratio, which dropped to 0.69 as on March 31, 2021. Peers National Insurance and United India Insurance are also facing a similar plight.

Emails sent to Oriental Insurance, National Insurance and United India Insurance remained unanswered.

Here are key financials of these insurance companies:

The solvency ratio indicates a company’s ability to fulfil its long-term debt and other financial obligations. In case of insurance companies, it's been mandated to be maintained at 1.5 times of the assets by the regulator, taking into account the risky nature of the business.

An adequate solvency ratio protects policyholders, even in case of unforeseen circumstances where claims may exceed technical provisions set aside by a company towards anticipated liabilities.

The regulator has so far taken no action against the decline in solvency ratio at the state-owned general insurers.

In case of Reliance Health Insurance in 2019, when the solvency fell to 0.63, even after the regulator asked it to take remedial action, the IRDAI directed the company to stop issuing policies since it could be damaging to the interests of policyholders.

Reliance General was asked to make good any existing claims on policies issued by it.

In case of Oriental Insurance, the government has taken steps to improve the solvency with a target of a solvency ratio of 1.21 by FY26. It is unclear as to what will happen to its public sector peers.

The combined ratio is the sum total of claims and expense ratio of a general insurer. While the claim ratio indicates the claims paid as against the premium earned in the year, the expense ratio gives the operating expenses incurred to earn the net premium during the year.

A combined ratio of more than 100% indicates the expense of the company is more than its income.

After-tax losses point to the battered state of the financials.

Except for New India Assurance, the other state-run companies are gradually losing market share.