NIC's solvency margin falls below par
Kolkata-based National Insurance Company (NIC) has seen its solvency margins - the minimum prescribed surplus of assets over liabilities - fall below the level prescribed by the Insurance Regulatory and Development Authority (Irda).
By TNN |
MUMBAI: Kolkata-based National Insurance Company (NIC) has seen its solvency margins — the minimum prescribed surplus of assets over liabilities — fall below the level prescribed by the Insurance Regulatory and Development Authority (Irda).
NIC’s solvency margins are now down to 1.2 times what the Law prescribes as against 1.5 times required by the regulator. Solvency margins are the insurance industry’s equivalent of capital adequacy ratio (CAR) in the banking sector.
Insurance companies are expected to increase their net worth in line with the increase in exposure to risk to ensure that there is some cushion in case any assumptions go wrong. As a measure of abundant caution, Irda has asked companies to maintain solvency margins at 1.5 times what is legally required.
The future course of action for the regulator would depend on the kind of profits the insurance company generates in the current year. If the surplus ploughed back results in improving solvency margins to the prescribed level, there would be no problem for NIC.
However, if the ratio declines further, the regulator would then prescribe a time frame for NIC to bring in more capital. Since none of the state-owned insurance companies are listed, their only source of equity capital is the government. If the company fails to increase its capital, the regulator then puts limits on the amount of new business it can underwrite.
NIC’s balance sheet has been under pressure because of certain large losses. But while the company has been suffering underwriting losses for several years, profits on investment have been on the rise. This year too, investments are expected to do well with the Sensex touching new highs.
The company has had an exposure to ONGC which had a major claim on account of the fire on its offshore platform. The company has also seen its motor insurance margins shrink due its aggressive strategy. A couple of years ago, it took a hit due to a policy issued to Reliance Infocomm.
The pressure on solvency margins would mean that the company does not have the capacity to participate in a price war when the pricing will be liberalised, following detariffing in January ‘07.
According to a study by Crisil, detariffing will increase underwriting losses of insurance firms since the benefits from the increase in motor (TP) third party premia may not be sufficient to completely offset the impact of cut in premia in other profitable areas of business.
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