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Photo: AFP
Photo: AFP

A financial health check of state-run insurers to be listed

Mint takes a look at some of the key financial indicators of these general insurance firms and how they perform vis--vis some of their private sector peers

The government is working on a plan to list four state-run general insurers—United India Insurance Co. Ltd, New India Assurance Co. Ltd, Oriental Insurance Co. Ltd and National Insurance Co. Ltd—and national reinsurer General Insurance Corp. of India (GIC Re) in this financial year. Mint takes a look at some of the key financial indicators of these general insurance firms other than GIC Re and how they perform vis-à-vis some of their private sector peers.

Combined ratio is an indicator of the profitability of operations of an insurance firm. It is the ratio of the sum of incurred losses plus operating expenses to earned premium. Insurance firms strive to bring their combined ratios below 100%. Combined ratios have broadly deteriorated for insurers since 2013-14.When one compares the combined ratios of the public and the private sector, private sector is seen as more efficient even in the deteriorating overall market.

An an indicator of the capital strength of an insurance firm, solvency ratio refers to the company’s ability to meet its short-term and long-term liabilities. Insurance Regulatory and Development Authority of India mandates a solvency ratio of 1.5 for continuity in operations and stock market listing.The trend in solvency ratios shows three of the public sector firms have moved down in their capital strengths. National Insurance and Oriental Insurance have solvency ratios below 1.5.

“These companies will need to improve their capital strength through improvement in their combined ratio and through better investment income. The drop in investment income of Oriental Insurance and United India is a matter of concern," said K. Ramachandran, an insurance industry expert.

Investment income is the sum of profit on the sale and redemption of investments and the interest payments, dividends, and rents. Investment income is declining significantly for three of the four state-run general insurers. But it is not the case for most of the big private insurance firms.

Net worth is the amount by which assets exceed liabilities. It is an indicator of the financial strength of the firm. Three of the four state-run insurers, except New India Assurance, have seen an erosion in net worth in the last one year.

“The challenge to the insurance companies lies in keeping the policyholders’ funds in excess. This would ensure a better service to shareholders’ funds," added Ramachandran.

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