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While some private sector life insurance companies are gearing up for initial public offerings (IPOs) of equity, the situation is not the same for general insurance companies.
Huge underwriting losses, impacting their valuations, and stiff opposition from staff unions in case of the state-owned ones are the main reasons behind the lack of enthusiasm of non-life insurers to tap the capital markets. It is expected that the valuations for general insurance counterparts will be much lower (less than half) than of life insurers, due to claims being substantially higher than premiums collected in some key segments, like motor insurance.
"Motor third-party (TP) and corporate health have seen heavy losses, since the claims incurred are much higher than the premiums collected. The books would first have to be cleared of these before they approach the regulators (Securities and Exchange Board of India and the Insurance Regulatory and Development Authority of India) with a listing proposal. Otherwise, they would not be able to sustain their return to shareholders," said the head of insurance business in a large accounting firm.
The net incurred claim ratio of general insurers is 81.9 per cent for FY14, with motor third-party and aviation exceeding 100 per cent. This would mean for every Rs 100 collected as premium, Rs 81.9 is paid as claim.
"They would be in a better position for an IPO after two or three years, when the overall industry improves, from an underwriting perspective," said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services. He said corporate governance in the public sector companies would also undergo a drastic change if they proceeded for listing.
The general insurance sector collected Rs 79,936 crore of gross direct premium in 2013-14, the public sector contributing Rs 40,980 crore and the private segment Rs 32,012 crore. Stand-alone health insurers contributed Rs 2,245 crore.
Experts said the high underwriting losses, due to a higher incurred claims ratio, meant these would first have to be brought down before they initiated a process for an IPO. For public sector general insurers, the net incurred claim ratios was 100.8 per cent in the motor TP segment for 2013-14. For health, it was 106.2 per cent and aviation was at 174.5 per cent. Motor TP's net incurred claims ratio for the private sector was 121.5 per cent.
Heavy discounts offered to corporate clients to retain them have led to prices crashing in the health and fire portfolios. Here, the premiums charged are not commensurate with the claims experienced in the previous year.
The proposal for listing public general insurers had come up as early as 2007. However, the plans were postponed due to a change in government plans and lack of readiness of some companies, among others. Even at a recent meeting with the financial services secretary, the issue of listing these insurers was discussed, even as the insurance Bill passed by Parliament has paved the way for listing of the four public general insurers. No decision or timeline has been decided for the listing of these entities. The employee unions, meanwhile, are opposed to the listing of these entities.
For non-life insurers, sector analysts said that at current market conditions, they would get less than 50 per cent of the valuations being offered for their life insurance counterparts. For smaller companies, it is said that it could be even 1/4th or 1/5th of that of life insurers.
The motor TP portfolio is expected to bleed further, with unlimited liability for third-party accidents and lower annual premium rises than what the segment wants. While the Road Transport and Safety Bill, 2014 proposes to put a cap of Rs 15 lakh on insurer liability in TP accidents, several customer and transporters' groups are strongly lobbying against this.
The Insurance Laws (Amendment) Bill passed by Parliament early this month has enabled foreign partners to raise stake up to 49 per cent from the 26 per cent allowed at present. This has allowed insurers to begin stake sale action and later an IPO.
The capital employed in the non-life sector was Rs 42,656 crore as of 2013-14. For life insurers, the capital deployed was Rs 35,641 crore for the quarter ended September 2014. General insurance penetration was 0.8 per cent in 2013-14, compared to 0.61 per cent in 2003-04.
