Solvency ratios of life insurers under pressure, says Milliman

The solvency ratios of life insurance companies are under pressure due to the equity market meltdown triggered by the onset of the COVID-19 pandemic, said research from global actuarial and consulting firm Milliman.

Milliman research showed that continued sale of capital-intensive products such as protection and non-participating savings (plans that don't pay bonus) products with favourable customer returns, coupled with a low interest environment may give rise to further strains on solvency ratios.

To deal with this situation, it said several insurers are aiming to raise additional capital. Solvency is the minimum capital requirement for insurers, and it is set at 150 percent.

ICICI Prudential Life Insurance, for instance, announced in November that it has raised Rs 1,200 crore of subordinate debt (via non-convertible debentures). The company had then said while their solvency ratio is already at 205 percent and well above the regulatory requirement of 150 percent, it used the opportunity offered by benign debt market conditions for the benefit of its stakeholders.

Among other instruments, Milliman research showed that there is a growth in use of interest rate derivative contracts for hedging non-participating liabilities. It also said existing users have increased notional amounts and some new insurers have also entered the market for derivatives. Additionally for life insurers, Milliman said the declining interest rates are creating pressure on insurers' balance sheets. It said this necessitates a pricing discipline in guaranteed products, though intense competition for distribution is making this difficult to enforce.

Milliman research also showed that where there has been a high guarantee build-up due to sale of non-par savings, life insurers have sought to restore the balance by promoting participating product sales.

Going forward, it said in the future there could be avenues like risk-based capital framework that would help reduce the capital requirement. "Insurers are generally expecting a reduction in capital requirements as they would then get credit for the various risk management activities they have been undertaking," said the research.

Health insurance

For the health segment, the gross written premium has grown by more than 15 percent during April to September 2020 compared to the same period last year. However, coronavirus-related claims have been a source of concern.

Milliman research showed that overall claims have decreased significantly, but deferment of treatment could be the main driver. This, it said, may rebound towards the end of 2020 and into 2021.