How The Directive On Long-term Motor Insurance Is Impacting ICICI Lombard

A conscious call to reduce exposure to crop business, continued focus on profitable segments and diversified product mix has kept ICICI Lombard’s June quarter performance in good stead, despite the overhang of long-term motor insurance policies. While the general insurer’s GDPI — Gross Direct Premium Income, declined by 7.6 per cent YoY in the latest June quartere, excluding the crop segment, the growth in GDPI was a healthy 17.7 per cent — higher than the industry growth of 13.6 per cent. Sanguine growth in other segments have aided growth.

That said, the company’s profitability has been impacted due to regulatory changes in the motor segment, brought in last year; the trend is likely to continue in the coming quarters. The company’s combined ratio — the incurred losses and expenses in relation to the total premiums — rose to 100.4 per cent in the latest June quarter, from 98.8 per cent in the same quarter last year, on account of long-term motor policies and losses from cyclone Fani. This has impacted profitability to some extent. The company’s profit after tax grew by 7 per cent YoY in the June quarter.

Changes in motor insurance

Motor insurance has two components — a third-party (TP) cover and an own-damage (OD) cover. The former is mandatory and covers the legal liability arising out of damage to the property of a third party or bodily injury or death of a third person when the vehicle hits another vehicle or person. OD is optional and protects the vehicle against damage or theft.

The mandatory long-term insurance — five-year third party cover for new two-wheelers and three-years for cars — that kicked in in September last year, has impacted general insurers’ profitability.

While TP rates are decided by IRDAI, insurers have the flexibility to decide on the OD cover premiums. The mandatory long- term TP cover, and alongside OD cover (if opted) has led to pricing pressure, as insurers have passed on the benefit of renewal/ distribution costs reduction to customers. This has resulted in a higher claims/loss ratio (ratio of claims incurred to net earned premium).

In the latest June quarter, ICICI Lombard’s loss ratio in motor OD shot up to 68 per cent from 62.9 per cent in the same quarter last year and 59.2 per cent in FY19.

Come September, insurers can also issue standalone OD covers. This can lead to further price competition impacting loss ratios. However, over the next year or so, pricing should stabilise, checking the increase in loss ratio. Also, this presents insurers such as ICICI Lombard with newer opportunity, underwriting standalone OD (even if TP portfolio is risky). Also, collecting premium upfront for a longer term policy helps create a higher float or investible asset base that can generate returns. Overall, over the next one to two years, the mandatory long-term insurance should be ROE (return on equity) accretive for ICICI Lombard.

Focusing on profitable growth

The regulator revised the TP rates upwards across segments, effective June 16, 2019. While the benefit of this increase has not come in the June quarter, it is expected to flow in the coming quarters, but would vary across segments. While the increase in cars appears more attractive, that in CV has been lower than in earlier years. So the company expects to re-jig its focus, turning cautious on the CV segment.

As such, ICICI Lombard remains selective in the businesses it underwrites. Within health, for instance, given the not-so-attractive price increase in group health this year, the company may temper its growth in this segment. In the June quarter, health GDPI grew by 12.5 per cent YoY; loss ratio has declined to 76.2 per cent from 80.2 per cent last year.

Given the uncertain underwriting risk in the crop segment, the company has taken a call to exit its exposure in the segment (negligible in the June quarter); in FY19, 17 per cent of the business came from crop. Hence, cutting exposure to crop will impact growth in the coming year.

But several things offer comfort. One, this will lead to improvement in the overall claims/ loss ratio (ratio of claims incurred to net earned premium). In the June quarter, the loss ratio in crop stood at 110 per cent.

Two, the other segments growing at a healthy clip, should aid growth. The company is expecting to grow its preferred segments -- fire, marine, motor and health -- by 15-20 per cent.

In the fire segment, in particular, General Insurance Corporation of India (re-insurer) had prescribed minimum rates to be charged for certain segments, which were higher than the prevailing market rates. This had led to robust growth in GDPI within the segment (67 per cent). This should also improve the fire segment’s profitability over the coming year.