United India’s solvency margin breaches key mark

To improve margins, insurers can raise funds by either selling shares or through subordinated debt. State-run United India Insurance’s solvency margin slipped to 1.15, below the prescribed limit of 1.5, at the end of March 31, which a senior official attributed to an increase in third-party provisions related to motor policies.

Solvency margin is similar to capital adequacy of banks -it is the minimum margin of assets that the regulator wants an insurer to keep above its liabilities.

The Insurance Regulatory and Development Authority has prescribed that all insurance companies maintain a surplus of 1.5 times the liabilities at all times.

“Solvency margin fell below stipulated limit of 1.5 because of increase in motor third party provisions,” said the official, speaking on the conditions of anonymity. “The company is without a chairman for some time and, therefore, there was no one to question the conservative estimate of provisions given by the actuary.”

Third-party provisioning requirement at United India went up to Rs 7,500 crore during the last financial year from Rs 2,500 crore in the previous year.The post of the chairman is vacant since Girija Kumar, who was the officiating chairman, moved to Oriental Insurance two months back.

To improve margins, insurers can raise funds by either selling shares or through subordinated debt, as National Insurance Company has done. The cabinet approved the listing of public sector general insurance companies by selling fresh shares and some held by it.

Post the issue, the government’s holding in these companies will gradually come down to 75% from the current 100%. New India Assurance and General Insurance Corporation Re are expected to be the first to be listed.

Among other state-run general insurers, Oriental Insurance Company has a solvency margin of 1.18.

The debt sale has helped National Insurance improve its margin beyond 1.5, after it fell to 1.26. It has also stayed away from lossmaking businesses, writing more crop insurance and using the regulatory dispensation. The company had raised Rs 893 crore through subordinated debt that helped it to grow the business and manage solvency.

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