Sensing a gross violation of underwriting advisory, the Government has directed all State-owned general insurers to strictly focus on the Government’s prudent underwriting in their respective companies, a move aimed at reducing insurers’ stress on their financial stability and protecting the interests of the policy holders as well.
“In order to protect the interests of the policy holders, ensure that the public sector general insurers continue to effective players in the market for provision of insurance services on a long term basis, and ensure that unhealthy underwriting practices in these companies do not cause unnecessary financial strain on their financial stability. It is desirable that prudent underwriting practices suggested in the Government advisories are followed strictly,” said the Department of Financial Services under the Ministry of Finance.
Underwriting services are provided by some financial institutions, such as banks, insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee.
Underwriting losses not only cause financial strain to the insurers due to inter-company competitions but also result in spiking the policyholders’ premium in some way or the other. Raising serious concerns over various undue practices on underwriting by indulging in unhealthy inter-company competition, the Department has shot a letter to chiefs of all Public Sector Unit (PSU) general insurers on June 28, 2017, saying that they need to strictly follow the Government’s advisory in this regard.
The Government’s move came after the department found gross misuse of underwriting practices in almost all PSU general insurance firms in the country. In the letter, a copy of which has been accessed by The Pioneer, the Finance Ministry said that a proper underwriting mechanism should be put in place. “In order to contain the underwriting losses of the PSU insurers on account of various practices, including lack of prudent underwriting by indulging in unhealthy inter-company competition so as to snatch each other’s business by offering uneconomical and unviable discounts, it was felt necessary that a proper underwriting mechanism be put in place.”
When contacted, a senior official of the concerned department in the Ministry told The Pioneer, “It is true that we have noticed the gross misuse of underwriting rates in almost all general insurance firms in India. So, we have decided to take prompt and corrective action against those wrongdoings in the interest of customers/policy holders in this matter. We have also asked Chairmen and Managing Directors (CMDs) of all PSU general insurers to kindly note the concern and strictly focus on prudence in underwriting.”
However, the Ministry further said in the letter that it found flouting Government advisories by PSU general insurance firms, leading to huge underwriting losses. “As a result, these companies are solely dependent upon the investment income or profit from sale of investment. However, these are limited investments and are fast depleting as a result of indiscriminate disposal by the companies to make up for the losses on underwriting premium. Such an arrangement is not sustainable in the long run and has the capacity to permanently harm the competitiveness of the public sector insurers,” it added.
In most of the cases, it has been observed that insurers, both life and non-life, generally show huge underwriting losses following 'fake or unjustified claims by policyholders in some way or the other. In general insurance case, natural death is often passed off as an accident to get personal accident claims. Further, in areas like health insurance and motor insurance, fake bills for hospitalisation or vehicle repair are presented so that an insurer is forced to pay cash to the policyholders. However, industry sources said Oriental Insurance among other PSU general insurers incurred underwriting loss to the tune of around Rs 1,600 crore last year.
Citing yet another example, the Ministry said that a case of violation in health insurance scheme was brought to its notice and disciplinary action against the insurer was also contemplated. Issuing a note of warning for such insurers, it further said, “An appropriate pricing mechanism for pricing group health insurance should take into account the existing incurred claims ratio or ICR, management expenses, medical inflation, commissions, likely increase in quantum of claims due to ageing of covered group, increase in size of group, cost of underwriting of business and other such associated factors.”
Even after 17 years of liberalisation, the insurance industry continues to register huge underwriting losses every year, and it is an investment income which drives the growth of the industry. As per industry estimates, the general insurance industry pays around Rs 70,000-75,000 crore in claims annually, mostly towards motor, health and marine cases. However, experts said that numerous false road accidents have become a curse for general insurers in most parts of the country.
“In an investigation, it was found that it was flooded with disproportionate road accident claims from Uttar Pradesh. In many cases, those who died of natural causes were filed as road accident victims, causing enormous losses to insurers. After getting a handle on a few false claims, it managed to file 30 complaints with the police after the lucknow High Court ordered special investigation into the cases,” said a top insurer on condition of anonymity.