Third-party reserve norm to hit insurers

Written by Sitanshu Swain | Mumbai | Updated: Oct 12 2011, 05:22am hrs
The R44,000-crore domestic general insurance industry is in for a huge setback as the Insurance Regulatory & Development Authority (Irda) is gearing up to raise the reserve requirement from 153% to 205% for the loss-making third-party motor portfolio.

Due to excessive claims, the third-party motor portfolio the largest for domestic general insurers generates heavy losses and is solely responsible for the underwriting losses for a majority of the companies. Third-party insurance is mandatory for all vehicle owners.

The likely raising of the reserve requirement has been prompted by the latest study conducted by the actuary of UK government, appointed by Irda to audit the asset-liability of the third-party motor portfolio.

General insurers need to maintain a particular level of reserve requirement for the third-party motor portfolio as required by Irda, as the companies dont settle motor claims immediately and, sometimes, take years to do so.

Most of the third-party motor claims invariably go through prolonged litigation processes before they are settled with directives from courts. After raising the reserve requirement for the first time in many years from 126% to 153% in March 2011, on the basis of a study prepared by eminent actuary KP Sharma, Irda had hired an actuary from the UK government to go for further audit and suggest the right level of reserve requirement.

Confirming the development, a senior Irda official said the actuary has completed its study and concluded that Indian general insurers need to keep a minimum reserve requirement of 205 %. We had appointed the UK government actuary to maintain the highest quality standard for the audit. Though the actuary has submitted the report, we have sought some clarifications. We should be able finalise the report in 2-3 months, said the official. However, the official didnt comment on when the Irda will implement the recommendation. General insurers, obviously, arent happy.

The issue of reserve requirement by general insurers for third-party motor insurance has always lacked transparency as general insurers go for under-provisioning to minimise their losses and to remain profitable, said an analyst.

In March 2011, when the Irda had first raised the reserve requirement to 153%, general insurers had suffered a loss of R10,250 crore in 2010-11. They had to bring in extra capital to maintain the reserve requirement.

In 2010-11, New India Assurance (NIA) , the state owned largest general insurance company, plunged in to red for the first time in 91 years.

Irda also had to provide a relief by allowing general insurers to maintain a lower solvency ratio, below the mandated level of 150%, in the next three years and had allowed them to raise third-party motor premium within the range of 10-60%.

Despite good growth in business so far in 2011-12, the industry is still struggling to make profits as the new reserve requirement has put heavy burden on the general insurers.

Analysts say that many general insurance company promoters, such as the State Bank of India (SBI), which has floated SBI General Insurance, ICICI (ICICI Lombard General Insurance), HDFC (HDFC Ergo General insurance) and Bajaj Fin Serve (Bajaj Allianz General Insurance), are listed companies and would suffer losses if the new regulation comes into effect.