General insurance industry faces Rs 10,000 cr hit in FY12

There is no free lunch.

The general insurance industry, which was rejoicing at the decision of the Insurance Regulatory Development Authority to dismantle the commercial third-party motor pool, has now realised it will come at a cost.

All the 24 general insurers in the country are staring at a loss of Rs 10,000 crore (Rs 100 billion) in the current financial year as Irda is set to increase the provisioning norms for the commercial third-party motor pool to 163-213 per cent from present 153 per cent.

The provisioning will be 213 per cent for the current year, 183 per cent for 2010-11 and 163 per cent for 2009-10.

Provisioning for the year 2008-09 will be 153 per cent.

The decision, expected to be announced in a couple of days, is based on the regulator's revised estimate of the loss ratio on account of the commercial third-party motor pool.

This is the second time in a year that the provisioning requirement has been increased by the insurance regulator.

Last month, Irda decided to do away with the existing commercial third-party motor pool and said it would be dismantled on a clean-cut basis.

This means the losses will be shared in accordance to the new loss ratios according to the regulator, expected to be in the region of 163-213 per cent.

"An increase of one per cent in provisioning means an additional capital or loss of around Rs 100-150 crore (Rs 1-1.5 billion).

"So, the increase in provisioning requirement would mean a serious impact on the
profitability of the sector in the current year.

"However, the exact impact will be clear only when the final orders are out," said Gaurav
Garg, CEO, Tata AIG General Insurance Company.

The motor portfolio, which constitutes around 43 per cent of the total premiums, has always been the Achilles' heel of general insurance companies in India due to inherent losses on account of commercial third-party losses.

The claim ratio is estimated at 153 per cent. That means for every Rs 100 premium collected, the claims paid are Rs 153.

Besides, commercial third-party premiums are regulated.

The industry took a hit of Rs 10,250 crore (Rs 102.5 billion) last year on account of commercial third-party motor pool losses, as the provisioning norms increased from 135 per cent to 153 per cent.