ICICI Lombard General Insurance Co. Ltd is the first non-life company to go public in India. The IPO opened on 15 September and will close on 19 September. Being an offer for sale, ICICI Bank Ltd will dilute 7% of its stake in the insurance company, whereas Fairfax Financial Holdings Ltd will dilute 12% of its stake. The company looks to raise Rs5,700 crore from the IPO. There are 31 non-life insurers in India and ICICI Lombard leads among private insurers with a market share of 10%. Bhargav Dasgupta, managing director and chief executive officer, ICICI Lombard General Insurance, talks about how listing will bring in greater transparency and why a shift towards underwriting profits is better for customers. Edited excerpts:
How does one analyse the business of a non-life insurance company? In the case of life insurance for instance, concepts like embedded value, persistency ratio and the value of new business margin are important in analysing the company. What should the investor look at in non-life?
General insurance business is a complex business to operate but far simpler to analyse from an investor standpoint. The key ratio to look at is the combined ratio. This is made up of the loss ratio of a company and the expense ratio. So if this number is below 100, it means the insurer is making underwriting profits. However, the issue is that not all claims come immediately, some may get reported in due course. The loss ratio for any company will have three major components: one is the paid claims ratio; second is claims reserves (claims that are reported but not paid during the accounting period); and third is IBNR, which is incurred but not reported claims. These are claims in the current accounting period that have occurred but have not been reported yet .
This is a very important aspect because third party claims in India don’t have a time limit and the liability is unlimited. So, you can have claims that can come significantly later, but from an accounting perspective, you need to predict that and reserve accordingly. So it’s important for an insurer to reserve adequately and also disclose it as part of its standard disclosures. Reserving triangles are globally used in public disclosures to depict the adequacy of reserves based on successive valuations. We are the only non-life insurance company in India that has been disclosing reserving triangles in our annual report since FY16. So, as an analyst, when you look at a non-life company, you look at the combined ratio in conjunction with the reserving.
The other aspect is the investment of the float, i.e., the premium that remains with you till the claims are paid.
But insurers have been reluctant to disclose. In fact, when the insurance regulator suggested that insurers go public after 8-10 years of operation (8 years in the case of non-life insurers), there was push-back from the industry.
I feel mandatory listing is a good thing to happen because after a point you should be able to create enough size and scale, and disclosing important metrics shouldn’t be a problem. However, the counter-argument to mandatory listing is that the choice of capital structure should be left to the individual company and I think that’s also a fair point. But after 8 years, the disclosure norms should be the same regardless of whether you are listed or unlisted. In my mind, the positive (aspect) of listing is disclosure. But if you have other reasons for not getting listed, then at least disclosures should be common.
So far the industry has mostly made investment profits but when you analyse numbers like the combined ratio, underwriting profits will also become important. How will this change underwriting practices?
You need to build a business that’s sustainable, and underwriting is core to that. Ultimately, underwriting quality needs to be the focus. Given the high investment returns in India, the return on equity is good and you make profits even if you are operating your business at a combined ratio of 100%. But eventually, you need to focus on underwriting because unless you do that you can’t invest for the future. Also, at times you may end up compromising on claims service if you don’t make underwriting profits. Listing should bring in underwriting discipline, but only time will tell.
There has been much focus on technology in the non-life industry. For instance, in health insurance, technology is used for preventive healthcare. Even in motor insurance, it is expected that telematics will lead to better underwriting and price differentiation. What’s your view?
Talking about health insurance, we have mobility solutions to source policies and internal processes have been digitized for quick issuance, but selling health insurance still needs face-to-face interaction. In terms of preventive healthcare, there are solutions such as wearables. Experiments are going on regarding using them for wellness and preventive solutions. But these are still early days to leverage them for pricing or controlling loss ratios.
Coming to motor insurance, digital technology is changing the delivery mechanisms. At the sourcing stage, we have chatbots where a customer can buy a motor insurance policy online and also pay the premium using the chatbot. In claims, we now service 90% of claims through tablets. In fact, customers are allowed to use our app and upload videos of motor damage so that we can assess the damage and arrive at the claim amount real time. But in terms of using telematics, like installing devices in vehicles to capture the driving pattern and offer differential pricing, these are early days. Many insurers are doing it on a pilot basis but it has not changed the dynamics yet. In India, the margin for motor insurance is very low and so it does not sustain the cost of fitting telematics devices en masse. But technology costs are coming down and as it becomes more sustainable, we should see a greater role for telematics.
I want to focus on the service standards in health insurance because reader feedback points to several problems. For instance, at the time of claim, customers are asked for a cash deposit by hospitals or are left waiting for a longer period while claims are settled. Some people experience huge spikes in renewal premiums and some feel call centre communication is too robotic and standard. How do you handle these issues?
In terms of ensuring faster claim settlement, we have done two things. First, we have digitized the authorization process (no need to send faxes) so that the turnaround is quicker. Second, we have agreed on standard package rates and if there are additional charges made by hospitals, we take it up with them.
Talking about premium hikes, till the amended regulations in 2015, price increase was applicable in blocks of 3 years. Currently, medical inflation is 10-15%. So, if you don’t increase the price every year but only once in 3 years, automatically there will be a 45-50% jump. The underlying issue is healthcare inflation and that needs to be addressed.
Yes, communication and understanding nuances of customers is a real issue. We have realised that when the service call centre is outsourced, training and quality control become a huge challenge. Back in FY14, we decided to make this in-house, and we have seen significant improvement in some metrics, for example, first-call resolution.
How will transparency and disclosures improve as a result of insurers going public?
When you disclose your reserving practice and combined ratios, the investors get a sense of how well the company is doing in terms of underwriting the business. With listing, there will be greater focus on disclosures and governance because of the new stakeholder, the public. Tapping the markets gives a lot of visibility to the industry which is a positive. Also, we are now seeing financialisation of savings. For instance, there is an increased flow in mutual funds. So the investment industry needs new avenues to invest and listing gives them access to the general insurance industry.
Why is home insurance still under-penetrated? With the rise in natural calamities one would think there is more demand for home insurance. Are insurers not innovating enough in this space?
Home insurance is a huge opportunity but I don’t think lack of innovation is the reason for it not being popular. We have had innovations that have resulted in significant uptake in other categories such as motor. The problem with home insurance, in my view, is that it needs a shift in mind-set. When floods take place, there is an elevated demand for home insurance, and then it peters out. But I am confident that it will pick up just as health insurance has in the past 5 years.