Kolkata: When K. Sanath Kumar took charge as chairman and managing director of Kolkata-based National Insurance Co. Ltd in February, the state-owned general insurer was going through a lot of stress. Its solvency margin—the key indicator of an insurer’s financial health, much like capital adequacy ratio for banks—had fallen below 1.5%, and the Insurance Regulatory and Development Authority of India (Irdai) was scrutinizing its books.
Sanath Kumar decided to clean up National Insurance’s books, which resulted in net profit for 2015-16 plummeting to Rs200 crore from Rs968 crore in the previous year. Claims had shot up and yield on investments was contracting, he said in an interview. Still, legacy issues had to be dealt with, more so because the Union government had announced in the last budget that state-owned general insurance companies were to be taken public.
To be sure, National Insurance has not been selected to be the first to sell shares through an initial public offering (IPO). That decision is yet to be taken by the ministry of finance, but after months of clean-up, Sanath Kumar said his company is ready to hit the market.
At the same time, he warned that Indian general insurance companies are not going to make profits from their core business of underwriting for at least two more years.
Edited excerpts from an interview:
What are your targets for your two-year-term as chairman?
When I took charge as CMD (chairman and managing director), this company had not had a full-time chairman for two years. Traditionally, this company used to be No. 2 among the state-owned general insurers, but from December last year, we started to slip. We are currently No. 3 with a market share of 12.3%, one percentage point lower than what it used to be previously.
We closed fiscal 2016 with a net profit of Rs200 crore whereas in the previous year it was Rs968 crore. Our total premium collection during the year grew 8% to Rs12,000 crore, which, too, was slightly behind the market average of 12-13%.
By December next year or latest by the end of 2017-18, we expect this company to push up its market share to 15%.
We also expect this company’s solvency margin to improve to 2% from the current level of 1.26%. We have to maintain solvency margin at 1.5% but we have taken time from the regulator to pull it up. We are at 1.26% and if it falls below 1%, we cannot do business. Because it fell below 1.5%, the regulator was keeping an eye on us when I took charge. But the correction process has started and by the end of the current financial year, we will pull it up to 1.5%.
How do you get to 15% market share?
To achieve 15% market share, it is obvious that we have to grow faster than the market. But getting up to 15% actually means more than a three-percentage point gain for us because we are scaling back in certain areas where we are bleeding. So to get there, we have prepared an action plan.
We have to dispose of claims faster. At least 70% of claims should be settled within a month. And we are trying to improve our internal processes so that we could settle claims for up to Rs20,000-25,000 within days. We have already cleared some 3,500 claims instantly, and this is going to be scaled up further.
For so-called suit claims, or ones that come through courts—mostly third-party liabilities—we would like to go for one-time settlements without waiting for the time-consuming court process to come to an end. With people who are willing to settle, we are doing that increasingly.
The aim is to build capability to respond to customers’ needs faster. Being a government-owned company, we enjoy people’s trust. Now, we need to improve customer servicing. We are giving some of our key employees training to develop soft skills. We wish to be seen as the friendliest insurer in the country.
What kind of money do you need to raise to drive growth?
We have about one year in hand but we have internally assessed that we need to raise Rs2,000-3,000 crore to support our growth plan for the next five years. It is for the government to decide how we will raise the money, but IPO is a good option, and we are ready in the sense that systems are in place to take the company public. I expect the government to decide on the proposed IPO in about a month, which, in turn, will determine how we raise the money.
Considering that 2015-16 was a bad year, is it a good idea to go to the market now?
Yes, there was a huge dip in profits last year, but that was on account of two things.
A one-time clean-up of our balance sheet. All the necessary corrections have been done, and we can now say there are no hidden liabilities.
The other problem was a sudden spurt in claims, both from health and motor insurance segments. These two segments account for 80% of our total business, whereas the industry average is 70%.
We have identified the areas and have now regained control of the situation. Things have already started to improve: claims have started to come down and premium collection is growing faster.
In the past month, we have grown at 12%, though for the first five months of the current year, our cumulative growth is less than 10%. But we will get to double-digit growth within months. Our profitability will certainly improve over the previous year—our net profit this year will certainly exceed Rs200 crore—but at the same time, as an insurance company, we need to build reserves by putting aside money to meet unanticipated liabilities.
How profitable is your core business of underwriting?
I don’t see general insurance companies in India making profits from underwriting for at least two more years. Our own underwriting losses last year were at Rs3,633 crore. It was slightly higher than other years for reasons I have explained before, but it’s a fact that we will continue to make losses from underwriting for at least two more years.
The underwriting losses come mostly from group health schemes and third party claims from the motor insurance segment. The problem is, the healthcare sector in India is not regulated. So, there are a lot of irregularities.
Also, the cost of healthcare has gone up substantially, but insurers have not been able to price group insurance policies correctly because of competition. We continue to undercut each other, but insurance companies have now started to realise that is not going to pay in the long run.
Losses arising from third party claims in the motor insurance segment is another concern. Both the ceiling for the liability and the premium that we can collect are determined by the regulator—it is the only product which is still controlled by the regulator. The pricing is improving but we are still about two years away from making profits from underwriting.
General insurance companies in India make money out of their investments. The fair value—and not the book value—of our investments is Rs18,000 crore.
The problem is the yield on this investment is coming down. In 2014-15, it was 9%. In 2015-16, it came down to 8% and in the current year, it will come down further to 7.5-7.7%.