The Indian government, concerned about the health of the insurance industry in the country, has directed all state-owned general insurers to strictly adhere to prudent underwriting practices.
The Department of Financial Services under the Ministry of Finance sent a letter to the heads of all Public Sector Unit (PSU) general insurers on 28 June 2017 in this regard, reported the Daily Pioneer.
The letter said: “In order to protect the interests of policyholders, ensure that the public sector general insurers continue to be effective players in the market for the 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 government advisories are followed strictly.”
The government’s move came after the Department found deviations from prudent underwriting practices in almost all PSU general insurers.
The Finance Ministry, in the letter, called for a proper underwriting mechanism to be put in place, in order to contain underwriting losses of the PSU insurers arising from various practices, including indulging in unhealthy competition so as to “snatch each other’s business by offering uneconomical and unviable discounts”.
The Ministry further said in the letter that it found that as a result of flouting government advisories, PSU general insurers face huge underwriting losses. “As a result, these companies are solely dependent upon 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 public sector insurers,” it added.
When contacted, a senior official of the Financial Services Department 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 the Chairmen and Managing Directors of all PSU general insurers to kindly note the concern and strictly focus on prudence in underwriting.”
Citing group health insurance as an example, the Ministry 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 the covered group, increase in size of the group, cost of underwriting of business and other such associated factors.”