Will the Private Insurers Last for Another 25 years.

Life Insurance is a long term contract and like any contract that operates over a long time, the customer asks himself if the provider is going to last for the entire term of his contract. This is a legitimate question as the contract is of no use if the company ceases to exist.

In my opinion this is not a question that should bother you too much.  Let me explain why.

Firstly, the Insurer underwriting your policy cannot carry the whole risk by himself. The insurer in turn sells (re-insures in technical terms) a large part of the risk to a re-insurer.  Re-insuring risk re-distributes the risk among a wider population than is the Insurer’s direct market, thereby reducing the risk to the Insurer. This is similar to a person reducing the risk of the equity market by investing a basket of stocks instead of a select few.  A typical life insurer re-insures about 80% of the risk. Should a claim occur then a proportional amount of the claims will be paid by the re-insurer. 

Secondly IRDA, the Insurance regulator in India, requires the insurers to maintain enough capital to pay for all the risks it has taken on. This is called reserve in technical parlance.  In India insurers are required to maintain a reserve of 1.5 times the total anticipated claims.  This ratio is known as the solvency ratio. Insurers are required at least on an annual basis to review how much claims they would be expected to pay on the business they have taken on.  The total capital they are required to maintain is 1.5 times the anticipated claims amount.  The average solvency ratio in India for Life insurers is 3.4 at the end of FY2012-13.  All regulators watch this ratio like a hawk.

Ironically the life insurer with the lowest solvency ratio (of 1.58) is LIC. But worry not, LIC has a Sovereign guarantee and should LIC be insolvent then our government will dip into the tax payer’s pocket to pay the policyholder’s claims.  Private Insurers with no ability to dip into the tax payer’s pocket maintain a solvency ratio of 1.81 to 6.43. A solvency ratio of higher than 2.0 is taken as adequate capital in almost all major countries worldwide.

Policylitmus

You can check the solvency ratio of Indian Insurers at www.policylitmus.com