General insurers face tough choice on pushing growth and sustaining margins

Mumbai: The country's general insurance companies are currently grappling with a crucial dilemma between pursuing growth and maintaining profitability at a time when they are allowed to spend more on operating expenses even as their margins have been narrowing.

In the fiscal year 2023, the combined ratio - an indicator of profitability, which is calculated by measuring the sum of incurred losses and operating expenses as a percentage of earned premium - rose for almost all general insurers.

If the combined ratio is below 100%, it indicates that the insurer is making an underwriting profit; if it's above 100%, then the firm could be spending more in claims than it is earning through premiums. The insurer could still be profitable because the combined ratio does not take into account investment income.

ICICI Lombard's combined ratio stood at 104% last fiscal while that of and Acko General was 155%.

At the same time, in its latest expense of management (EOM) guideline, the insurance regulator has removed the 30% cap on operating expenses of insurers, thus aggravating their confusion. "General insurers in India are facing a growth versus profitability conundrum," ICICI Securities said in a report. "This is at crucial crossroads in FY24 against the backdrop of increasing combined ratio for all players in FY23 and room for increasing opex ratios basis the EOM guideline where we see 10 out of top 18 multi-line players in the industry operating under the 30% benchmark and two out of four SAHIs (stand-alone health insurers) operating below the 35% mark." Now, there is a concern about whether pricing discipline can be maintained among insurers.

Eight insurers breached the expense cap last fiscal with Acko reporting EOM of 55%, and Niva Bupa 40%. Public sector insurers Oriental and United Insurance, too, had reported EOM of above 30%.

ICICI Securities believes that competitive pressure can continue as many players may strive to gain market share, especially those that are unlisted, and more players would settle for lower returns on equity (RoEs) - in the 15% range.

Meanwhile, public sector undertakings (PSUs) in the general insurance industry continue to face market-share erosion. Their combined market share declined to 37% in FY23 from 38.4% in the previous fiscal even as their gross direct premium income (GDPI) grew 12% YoY, according to ICICI Securities report.

"Market share in retail is a function of 3 things - product attractiveness, distribution strength and service quality, and PSUs are medium in first, good in second and possibly below the private sector in the third," said Joydeep Roy, partner, India financial services advisory leader at PwC. "Hence, unless the service quality is improved, transparency increased, and response times accelerated, market share is bound to go to the large number of private companies in retail."