India's non-life insurance market is marked by continued reliance on realised and unrealised investments gains to offset technical losses, potential short-term disruption from regulatory enhancements and persistently competitive and underperforming core business lines of motor and agriculture, notes international rating agency AM Best.
In its Best’s Market Segment Report, titled “Market Segment Outlook: India Non-Life Insurance”, the rating agency says that it is maintaining a negative market segment outlook.
India’s non-life insurers have been one of the main beneficiaries of the country’s fast growing economy, and the industry has seen a substantial increase in insurable risks, largely driven by compulsory agriculture insurance. However, heavy competition and cumbersome regulatory hurdles for product development hinder technical performance, with most companies relying on strong investment income derived from the exceptional performance of Indian equities, which have shown sustained outperformance relative to global indices.
The market’s combined ratios has fluctuated between 110 and 125 over the past five years, and most insurers have become dependent on investment income to generate profitability. The sustainability of such earnings may put the long term viability of many insurers into question.
Motor insurance, which consists of own damage and third party liability (TPL), continues to dominate the non-life insurance market, generating about 40% of premium volumes. Market results indicate that the segment’s incurred loss ratio has improved over time.
However, the size of the reserves for this line relative to capital remains very significant. Although insurers have strengthened reserves in recent years, concerns about the prudency and potential for tail development remain, given that some claims may get caught up in India’s slow-moving court system. Unfavourable reserve adjustments have the potential to significantly impact current performance and capital even more so, given the lack of profitability in many other lines.
A mandatory crop insurance scheme, launched in 2016 to provide insurance coverage to farmers, has provided a premium boost to non-life insurers, catapulting agriculture premiums to INR20.6bn ($295m) in the fiscal year ended 31 March 2017 (FY2017) from INR5.3bn in FY2016.
However, the scheme recently has come under criticism due to volatile loss ratios given the wide variances between the country’s two main cropping seasons, as well as reported numerous delays on claims settlements.
Despite the negative outlook, AM Best recognises that some non-life insurers still may experience growth. The international rating agency says that profitability and capital strength of companies that demonstrate sound risk management practices and disciplined underwriting likely are to improve steadily.