Insurance Article, The Insurance Times 2020, The Insurance Times June 2020

HOW THE GENERAL INSURANCE INDUSTRY COULD ROAR TO LIFE AFTER LOCKDOWN IS LIFTED

There will be very muted growth, if at all, for the insurance industry in the first quarter of financial year 2020-21, but the Covid-19 pandemic may serve as an inflection point when Indians realize the importance of insurance. The non-life insurance sector posted an 11.7% increase in premium income to INR1.89tn ($24.7bn) in the year ended 31 March 2020 (FY2020), compared to the previous financial year. In comparison, total premiums increased by 14% in the non-life sector in the 11 months to February 2020. Among non-life insurers, standalone health insurers saw a 27% jump in gross direct premium to INR144.1bn in FY2020, reflecting in part the increase in purchases of health insurance products amidst the COVID-19 pandemic. Other non-life insurers (excluding two government owned specialist insurers) saw a 9.5% growth in gross premiums in FY2020 compared to the previous financial year. Listed New India Assurance was the largest company in the sector with a premium volume of INR267bn, growing by 11.7% over FY2019. For the month of 2020 alone, when the pandemic worsened, the combined GWP of non-life insurers (including specialized state owned insurers) declined by 10.7% to INR157.85bn, compared to March 2019. General insurers reported a fall of 15.3% in premium collection to INR133.86bn in March 2020, whereas standalone private health insurers increased business by 4.3% to INR18.07bn. Specialized state owned insurers, namely, Agriculture Insurance Company of India, recorded a surge premium collection of INR5.91bn in March 2020. Among the general insurers, state owned companies posted a 13.9% decline in GWP to INR67.08bn while private sector general insurers saw business fall by 16.6% to INR66.78bn in March 2020.The weak March 2020 performance is attributed to the lockdown announced by the government aimed at curbing the spread of COVID-19. Bank branches which are a major channel of insurance sales operated with skeletal staff while agents were unable to travel to meet prospective clients due to transport restrictions. A summary of the GWP of non-life insurers in FY2020 is as follows:

Figures in

INR m

FY2020 FY2019 Change Mar 2020 Mar

2019

Change
General insurers 1,641,928 1,599,450 +9.5 133,863 157,871 -15.3
Standalone health insurers 14,410.0 113,540 +26.9 18,072 17,322 +4.3
Specialized insurers 106,128 81,484 +30.2 5,911 1,437 +311.3
Agriculture

Insurance Co

95,376 69,009 +38.2 5,172 (46)
ECGC 10,752 124,75 -13.8 739 1,483 -50.0
Total 1,892,155 1,694,484 +11.7 157,847 176,729 -11.7

FEAR OF LAPSES IN INSURANCE COVERAGE: 

In a development, the IRDAI announced several measures aimed at ensuring continued proper service to policyholders and customers. All insurers have been asked to maintain continuity of business operations through alternative modes including telephonic and digital contacts. Large corporations risk lapsing insurance policies for their plant and machinery as well as employees, as both insurers and businesses are forced to shut shop because of coronavirus-related lockdowns in several parts of the country. All insurers have also been asked to display on their websites, information on the functioning of their offices and alternative arrangements made for premium payments, renewal, and settlement of claims and lodging of other service requests. In addition, the IRDAI has permitted the following relaxations:

  1. In case of life insurance policies, there is a grace period for payment of renewal premiums. Insurers have been asked to enhance the grace period by an additional 30 days if desired by the policyholders.
  2. In case of health insurance policies, the insurers may condone delay in renewal up to 30 days without deeming such condonation as a break in policy. However, insurers are requested to contact the policyholders well in advance so as not to have discontinuance in coverage.
  1. In case of board meetings of insurers, the meetings due till 30 June 2020 may be held through video conferencing or other audiovisual means.
  2. In case of submission of monthly returns for the month of March 2020 by insurers and insurance intermediaries, an additional time of 15 days will be allowed. Similarly, for quarterly returns, an additional period of up to one month will be permitted.

The IRDAI appeals to all the insurers, insurance intermediaries and distribution channels to be sensitive to the needs of the policyholders in these trying times, while policyholders are urged to cooperate. The government has made it mandatory for all employers which resume functioning as the lockdown gets over, to provide medical insurance to their employees. In cases where offices are not functioning fully or partially, the policyholders are mandatorily be notified by SMSes, e-mails,and press release in addition to display boards and pamphlets in the brand offices.

SUSPENDING DIVIDEND PAYMENS FOR FY 2020:

The IRDAI directed insurers, in view of the emerging market conditions, and to conserve capital in the interests of policyholders and the economy at large, to take a conscious call to refrain from paying out dividends from profits pertaining to the financial year ended 31 March 2020 (FY2020), till further instructions. This position shall be reassessed by the Authority based on financial results of insurers for the quarter ending 30 September 2020.The move follows a similar order given by the Reserve Bank of India’s (RBI) to banks. Insurance industry experts though voiced mixed views on Indian insurance regulator asking listed and unlisted insurers to refrain from paying dividends to shareholders from profits pertaining to FY2020. This is an advisory at best and an extraordinary one at that. But we are in extraordinary circumstances and the regulator wants to pre-empt any possible criticism at a later date that it did not even forewarn insurers. On this decision insurers have different views. Some industry players say that the IRDAI should allow insurers to pay dividends on a case-to-case basis than issuing an omnibus directive. Others say that the IRDAI should focus instead on helping general insurers generate underwriting profit.

FORMULA FOR DETERMINING AUTO THIRD PARTY OBLIGATIONS:

A report published by the Insurance Information Bureau of India said that out of around 220m vehicles in India as at 31 March 2019, the percentage of uninsured vehicles was 58%, even though auto TP cover is mandatory in the country. The percentage of vehicles which do not renew their insurance after the first year is high at 52% on average. Nearly 70% of the total number of vehicles in India consists of two wheelers, the working group report notes. Currently, two-wheelers form the bulk of vehicles plying the roads without insurance coverage. A working group of the insurance regulator, IRDAI, has recommended that motor third party (TP) obligation of non-life insurers be determined, based on the number of vehicles insured. Each non-life insurer is mandated to write a certain amount of motor TP business every year. Currently, the motor TP obligation is based on the premium income an insurer collects in any given year in this class of business. Motor third party insurance being an integral part of every individual vehicle, the monitoring of insurance of such vehicles (by every insurer) most appropriately should be on the basis of the count of such insured vehicles rather than (indirect/derivative) evaluation of premium derived from the insurance of such vehicles.

The working group has recommended three broad vehicle classifications – two wheelers, private cars, and others, and that the motor TP obligation for each insurer should be arrived at for each vehicle category. So now, no longer can insurers underwrite a larger ticket size of private cars or commercial vehicles and cover up for two-wheelers. This is because the current basis of relying on premium collected does not reveal the vehicle types covered by an insurer. Thus, insurers are inclined to underwrite risks of certain kind of vehicles which may be more profitable than others In the new formula, each insurer’s obligation will depend on their market share as well as the number of uninsured vehicles of as determined by Insurance Information Bureau of India for each category of vehicles. So, large insurers have to underwrite more TP business. The change in formula will mean that insurers will be mandated to write additional business to get uninsured vehicles covered by motor TP insurance. A new insurer licensed to underwrite motor insurance for the first time may be exempted from the application of the obligatory requirement during the first two financial years of its operations including the financial year in which its operations are started. A report published by the Insurance Information Bureau of India said that out of around 220m vehicles in India as at 31 March 2019, the percentage of uninsured vehicles was 58%, even though auto TP cover is mandatory in the country. The percentage of vehicles which do not renew their insurance after the first year is high at 52% on average. Nearly 70% of the total number of vehicles in India consists of two wheelers, the working group report notes. Currently, two-wheelers form the bulk of vehicles plying the roads without insurance coverage.

RELIEF FROM INSURANCE REGULATOR:

The General Insurance Council (GIC), the representative body of non-life insurers, is lobbying the IRDAI to relax certain regulatory requirements, particularly those related to the solvency ratio, particularly because of the current COVID-19 crisis. In a letter to the insurance regulator, GIC said that given the huge mark-to-market loss in equity investments in March, the IRDAI should waive the requirement for insurers to account for diminution in value in equity investments when they finalize their financial statements for the year ended 31 March 2020. Many insurance companies may see their solvency ratio fall below the required minimum level of 1.5 due to COVID-19 which has battered the stock market. While insurers ignore mark to-market-gains, they are required to recognize mark-to-market losses in their profit and loss accounts. Though the virus made a relatively delayed entry into India, the scare, the preventive shutdowns and the economic decline are unprecedented and the adverse impact on financial markets is quite telling. Without exception, the non-life insurance sector is severely burdened and we are afraid we will have difficulty in meeting certain regulatory requirements.GIC also said that companies could be allowed to consider mark-to market position as on 29 February 2020 as the basis of computing solvency. Alternatively, the IRDAI may relax the minimum solvency requirement of 1.5 times for the time being, on the same lines as the regulator had relaxed it at the time of dismantling the motor third party pool. Also, the insurance industry needs to provide for stressed debt investments as the same is not allowed for income tax assessment till the investment is written off. In view of the huge provisions made by the industry and the same disallowed for the purpose of income tax purpose, DTA (Deferred Tax Assets) created for such differences need to be allowed for solvency computation. Furthermore, GIC sought IRDAI’s forbearance in the compliance requirement of limits on rural and social sector obligations.

POLICYHOLDER’S INTEREST:

Insurance Regulator has issued detailed instructions for Indian insurers to meet the challenges emerging from the developing COVID-19 pandemic. Insurance, being a critical requirement of the population, has been exempted from the lockdown. However, insurance companies and other regulated entities are advised to operate their offices with absolutely necessary staff so as to maintain essential insurance services including claims settlement, authorization for hospitalization, renewal of insurance policies and such other activities.  In all the operating offices, extreme care needs to be taken by all concerned to maintain prescribed hygiene, social distancing etc. The IRDAI press release also contains an exhaustive list of safety measures that include several steps to streamline communications with major stakeholders of the companies. 

  1. Communication strategy: Insurers have to prominently display on their website a dedicated helpline number for policyholders and another help line number for other stakeholders including agents and intermediaries. Adequate arrangements may be made to service all the policyholders and other stakeholders satisfactorily through these help lines. The regulator has also instructed insurance companies to display frequently asked questions for COVID-19 claims prominently on their websites.
  1. Business continuity plans: Insurers have also been asked to put in place a business continuity plan (BCP) which inter-alia deals with processes, transactions, reporting and customer services to be handled in a seamless manner to take care of the present situation. A copy of the same will have to be submitted to IRDAI. Insurers will have to set up a crisis management committee to monitor the current situation on real time basis and to take appropriate timely decisions on the following issues:
  2. Issues pertaining to safety of staff, policyholders, intermediaries and agents
  3. Assessing new challenges that may emerge on a day-to-day basis and measures to mitigate them and
  4. Adopting necessary measures to minimize business disruption.

The crisis management committee will also be required to provide regular inputs to the risk management committee of the insurer.

The risk management committee will evaluate all major risks and shall devise necessary mitigation measures. Any severe impact on the operations or capital requirements or solvency margin shall be promptly communicated to the authority.

  1. Cyber risks and data security: IRDAI has also focused on cyber risk and data security. Due to enhanced remote working, it is possible that there could be an increase in the number of cyber attacks on personal computer networks. IRDAI has asked the insurers to take precautionary measures to address such cyber risks and to mitigate such risks as soon as they are identified. It has asked the insurers to educate their staff of possible cyber risks and the associated safeguards to be taken by the staff while working from home.

  1. Products: IRDAI has asked insurers to devise appropriate insurance products that would provide protection from risks arising out of COVID-19. The press release said, “The authority is committed to process such product approval applications on a fast track mode.

 

  1. Policy servicing and claims: Insurers have been asked to make special efforts to enable the policyholders to pay premium using digital methods by educating them through SMS, emails etc. IRDAI has said, claims arising on account of COVID-19 should be processed expeditiously. Insurers are encouraged to adopt simplified/expedited claim procedures for such cases. In addition, other claims should also be processed within the prescribed period by making special efforts.
  1. Grievance redressal: The normal response time for policyholder complaint redressal is 15 days, due to the prevailing lockdown situation, an additional 21 days is allowed in respect of all complaints which are received on or after 15 March 2020 and up to 30 April 2020. However, this additional response time is not applicable to complaints pertaining COVID-19 for which the extant timelines continue to apply.
  1. Travel insurance: In cases where insurers have issued travel insurance policies which were/are valid between 22 March 2020 and 30 April 2020, an option may be provided to the policyholders to defer the date of travel without any additional charge. 

IRDAI has again asked the insurers to take note of the circulars already issued by the authority with respect to insurance covers for COVID-19. The insurers should keep their respective boards informed of the actions taken by them in dealing with situations arising out of COVID-19. The authority is constantly evaluating emerging impact of COVID-19 on the insurance sector and will issue suitable instructions from time to time as considered necessary. Also, digital payments and other online facilities are to be ensured for smooth delivery of services and entertainment of claims.

EXTENSION OF RENEWAL DATES:

With the entire country under lockdown for COVID-19, the government has extended the renewal date for health and motor insurance policies. The extension is for people whose renewal dates for health and motor vehicle insurance policies fall in the lockdown period. The notification also says that the order came into effect on 1 April. The policyholders whose motor vehicle third party insurance policies fall due for renewal during the period on and from 25 March, 2020 up to the 14 April, 2020 and who are unable to make payment of their renewal premium on time in view of the prevailing situation in the country as a result of coronavirus disease, are allowed to make such payment for renewal of policies to their insurers to ensure continuity of the statutory motor vehicle third party insurance cover from the date on which the policy falls due for renewal. The IRDAI considering the prevailing situation in the country asked life insurers to extend the grace period for payment of renewal premiums by an additional window of up to 30 days if policyholders want it, which was accepted by the industry.

SOLVENCY MARGINES:

Insurers are required to adhere to the applicable accounting standards framed by ICAI (Institute of Chartered Accountants of India) and the authority’s regulations/circulars on preparation of financial statements and valuation of investments. While insurers ignore MTM gains, they are required to regard MTM losses as expenses. The IRDAI rejected a request from general insurance companies for a blanket relaxation of solvency margins in the face of the COVID-19 pandemic. However, it said specific cases would be considered on merit. The Council, which represents general insurers, asked for relaxation in calculating available solvency margins (ASM) on account of delays in tenders related to government schemes and delays in receiving subsidies.

The authority doesn’t see the need for general relaxation. However, any specific issues would be considered on merit. The GI Council had also said that given the huge mark-to-market (MTM) losses in equity investments during March, IRDAI should allow firms not to account for diminution in the value of equity investments while finalizing accounts for the financial year ended 31 March 2020. The GI Council had also requested that firms be allowed to consider MTM position as on 29 February 2020 as the basis of computing solvency. “Alternatively, IRDAI may relax the minimum solvency requirement of 1.5x for the time being,” the letter had suggested. Many firms may see their solvency ratio fall below 1.5 due to the crisis.

NO FRESH CAPITAL GEARING TREATIES:   

The IRDAI has warned insurers against entering into fresh capital gearing treaties, and to phase out existing treaties. The regulator says that it has observed that some insurers have entered into such arrangements in various forms including Quota Share Reinsurance Treaty. In a circular dated 28 March, addressed to general insurers, health insurers and specialized insurers. The terms of these treaties have been examined, and the Authority is of the considered view that such capital gearing treaties are of the nature of financial arrangements and not primarily a risk transfer mechanism. It appears that insurers have adopted these arrangements in order to improve the solvency margin ratio. The IRDAI thus directs the insurers to adhere to the following:

  1. no insurer shall enter into any fresh capital gearing treaties effective from the date of issuance of the circular (28 March); and
  2. Insurers which have such treaties on their books as on the date of issuance of the circular shall take the following steps:
  3. Submit Board approved action plan to the Authority by 30 June 2020 for phasing out the treaties along with timelines such that there is compliance with solvency stipulations. The plan of action shall also include an assessment of any requirement for capital infusion and sources of funds for the capital infusion where required due to prospective closure of these capital gearing treaties.
  4. the direct insurers (cedents) shall create appropriate reserves towards Unearned Premium Reserves, Premium Deficiency Reserves, Outstanding Claims Reserves (including IBNR/IBNER) in accordance with IRDAI regulations. Further, such treaties have to be accounted for in their financial statements, based on the principle of “Substance over Form”.

ESTABLISHING THE INTERNATIONAL FINANCIAL SERVICE CENTRES:

The Finance Ministry has issued a notification establishing the International Financial Services Centres Authority (IFSCA) to unify supervision over all financial services in international financial services centres (IFSCs) in the country. IFSCA will be headquartered in Gandhinagar in Gujarat, as per the notification. Currently, the banking, capital markets and insurance sectors in an IFSC are regulated by multiple regulators such as Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and IRDAI. The notification brings into effect certain provisions of the IFSCA Act, 2019. The central government has refrained from fully enabling the new authority with all its powers as envisaged in the Act. While allowing for the appointment of IFSCA members and other employees, setting up of funds and exemption from taxes, the government has not affected fully provisions for IFSCA pertaining to the regulation of financial products, financial services and financial institutions and its abilities to transact in foreign currencies and make rules. This means that the main function of the IFSCA will be to regulate financial products such as securities, deposits or contracts of insurance, financial services, and financial institutions that have been approved by the relevant regulator for the particular financial services sector.

The IFSCA board will comprise a chairperson, and one member each nominated by the regulators, SEBI, RBI, IRDAI and the Pension Fund Regulatory and Development Authority. There will also be two members from the central government and full-time or part-time members. A working group of the insurance regulator, IRDAI, has recommended that motor third party (TP) obligation of non-life insurers be determined, based on the number of vehicles insured. Each non-life insurer is mandated to write a certain amount of motor TP business every year. Currently, the motor TP obligation is based on the premium income an insurer collects in any given year in this class of business. Motor third party insurance being an integral part of every individual vehicle, the monitoring of insurance of such vehicles (by every insurer) most appropriately should be on the basis of the count of such insured vehicles rather than (indirect/derivative) evaluation of premium derived from the insurance of such vehicles”, the working group said in its report.

The Insurance Regulator has cautioned the general public about cyber fraudsters in insurance. There are occasional reports of fraudsters offering insurance with unusually low premium from fake entities through online and digital mode. The customer should take due care and verify the genuineness of the website, insurer, intermediary and agents before making any online payment. Insurance should be bought only from insurers and intermediaries registered with the IRDAI and the agents duly appointed by the insurance companies. The approved list of insurers and intermediaries can be checked from IRDAI’s portal, while agents’ authenticity can be verified from the portals of respective insurers. Marketers have a unique opportunity of being the customer’s confidante by assuring them that their interests are safeguarded. During such crises, financial concerns can seem daunting and add to the burden. India is still reeling under the impact of Coronavirus and lockdown. It has a wide-ranging impact across the sectors of the economy. In some cases, the impact is minimal and short-lived. However, in case of some sectors like insurance, the impact is going to be negative in the near term as it will be hit from multiple directions. In the long run, it is expected to change the way Indians look at protection cover and bring some long-lasting positive changes in the very long run. However, both general and life insurers will see a setback in terms of lower income on their investments and erosion of value. Also, the portfolio risk will be huge and might have to face sharp markdowns and higher market-to-market losses while arriving at the fair values of their investments due to sharp market correction. Post lockdown, growth for the motor insurance segment would also get restricted as the IRDAI has deferred price hikes for now. Also, it is still not clear as to how the liquidity crunch (cash flow pressures) at medium and small businesses impacts demand for other general insurance segments such as fire. With the rise in the number of coronavirus (COVID-19) cases in India, general insurance companies are set to come out with new package rates for treatment.

Merger of PSU general insurers is at an advanced stage. The government had raised nearly 17,500 crore through initial public offerings in New India Assurance Co Ltd and General Insurance Corp of India Ltd, the only listed state-owned non-life insurance companies. Though insurance offices are included under the list of exempted services under the lockdown however with general restriction on movement there is hardly any chance of new business. Insurance players with robust digital infrastructure should fare better than others, if there is a sharp rise in COVID-19 cases, as seen in China and Italy. One of the biggest challenges for insurers could be enabling alternative work arrangements for their employees and sales force such that they are more resilient and able to deal with increasing claims and shorter response times. Even when the dust settles with weakness in economy is bound to persist in the near term with threat of pay cut and job losses. Many of the answers lies in the next few weeks as how India tackles the corona issue. There have also been some proactive steps taken by the industry on product innovation front. IRDAI has asked insurers to come up new need-based products for coronavirus, and for which, a few insurers have come up with such need-based specific products to cater to the current requirement. These are defined benefit-based product where the benefit is paid on occurrence of the event and no bills are required. The industry has done well to find an opportunity even in such a situation however it still depends heavily on offline distribution which is bound to suffer. The prospect of industry getting back its momentum will depend both upon the time that India takes to recover from coronavirus and market crash.

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