'Insurance companies will need more capital'

'I now see rates rising again, particularly after recent losses — especially the January wildfires in Los Angeles.'

Following the company's third-quarter (Q3) earnings, Ramaswamy Narayanan, chairman and managing director GIC Re, spoke to Aathira Varier/Business Standard about the company's business strategy going forward while reflecting on its performance in the recently concluded quarter.

How do you see the performance, and what is your outlook?

We wrote about 26-28 per cent more compared to last year. It was a soft market, with a lot of capacities internationally.

Overall, we do about $1 billion in international business, of which almost $500 million came from renewals on January 1.

We are looking at similar growth in renewals starting April 1 on the international front.

Last year, we wrote more health business compared to other classes.

This time, we are looking at some of the newer classes -- liability, cyber, surety bonds, etc -- where we see growth opportunities.

Further, we are also looking at helping out companies. Now that collaterals are coming in, there will be areas where cross-border reinsurers may not want to write business because the volumes are small.

At the end of the day, our approach is clear -- the bottom line has to be positively affected. We will not support purely loss-making segments.

How has the ratings change supported the international business? Your international business accounted for nearly 40 per cent of your portfolio before the downgrade.
When do you see it returning to that level?

It will not be possible immediately. Currently, the ratio is 76:24 in favour of the domestic portfolio because international business declined this year as well.

Returning to the 60:40 ratio will be difficult for two reasons.

First, the domestic market is growing much faster than international markets.

Second, some classes of business that are available domestically are not present abroad.

We see too many opportunities here, especially with regulators introducing the risk-based capital framework and International Financial Reporting Standards.

Insurance companies will need more capital, and if they cannot secure it from their promoters, they will turn to reinsurance.

We will focus on writing quality, profitable business. While the overall mix may remain the same, I see the international business becoming profitable, with the combined ratio dropping below 100 -- maybe in the next two to three years.

The company's underwriting losses declined by around 62 per cent year-on-year...

We have been working to reduce underwriting losses. The domestic business has remained largely stable, but the key difference has been the foreign portfolio.

We have also performed well on the domestic front. The health business has done reasonably well, which has contributed to reducing losses.

We closed last year with about Rs 4,500 crore in underwriting losses. At the time, I predicted we would bring it down close to Rs 3,000 crore.

I believe we are on track to achieve that target.

With the January renewals complete, what trends do you see? How do you expect April renewals to be?

Renewal trends were soft because reinsurers have made money over the past two years.

Markets that experienced losses in the previous year naturally saw risk-adjusted rates rise. Some markets remained flat, while others softened, with prices decreasing.

I now see rates rising again, particularly after recent losses -- especially the January wildfires in Los Angeles (LA).

The direct market has been quite soft, so reinsurance rates will firm up to counterbalance that.

We will also assess how companies maintain those rates moving forward before making further decisions. Last April was slightly muted.

What is your exposure to the LA wildfire and the recent aviation incidents?

For one of the aviation incidents, we estimate about $7 million in exposure to potential claims.

Regarding the LA wildfire, we are still awaiting information, as the event was quite prolonged.

We have not received any loss outstanding data from our clients. Based on our understanding of the event, we have set aside around $25 billion.

However, I believe this estimate will decrease. At the time of our assessment, the insured loss was estimated at around $50 billion, but it has since been revised down to about $32 billion.

To that extent, we might see a reduction in our exposure.

What are your diversification plans in the domestic market?

The product mix will shift more towards retail, and that is what we are working on.

It will be a challenge, as retail business rarely enters the reinsurance market -- primary insurers can typically manage retail businesses themselves.

However, we are in discussions with companies to provide product capacities. We will share the business, with retail as our focus.

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