Profits of the four nationalised non-life insurance companies have more than halved within a span of three years from Rs 920 crore (Rs 9.20 billion) in 1997-98 to Rs 390 crore (Rs 3.90 billion) in 2000-01. In 2001-02, the four insurers registered a marginal loss, putting many in the red.

According to a study undertaken by Crisil, the four companies have witnessed a steady decline in their profitability on account of rising claims and consequent underwriting deficits as well as falling investment returns.

This trend is partially in keeping with most global insurers, most of whom have reported an underwriting deficit.

This follows the combined ratio comprising claims and expenses having exceeded premium collections. Profitability is thus dependent upon investment returns.

Crisil in its study of the four state insurers while pointed out that the solvency position is a redeeming factor, "companies' performance will remain under pressure till they drastically change their underwriting and investment strategies".

These would include adopting stringent underwriting standards, shifting the business mix in favour of profitable segments, structuring premium rates scientifically and enhancing due diligence while settling claims.

The industry's solvency cushion is a reassuring factor, estimated at about twice the regulatory requirement, said Crisil.

Moreover, the high cushion in the investment portfolio - given that the market value of investments exceeds the book value - enhances the adjusted solvency ratio, which is another comfort factor, the study stated.

Nevertheless, Crisil believes that if the decline in industry's profits were not stemmed, going forward, it would impact its solvency shield in due course of time.

"Diminishing investment returns have exacerbated the pressures on the non-life industry," said Crisil director (rating criteria and product development), S Venkataraman.

The industry's investment yield dropped sharply to 11.2 per cent in 2001-02 from 13.5 per cent in 1997-98, following the downward trend in yields on government securities and rated corporate paper during the period.

While positive developments such as the increase in motor premium rates, tightened motor insurance terms and the absence of major catastrophes during 2002-03 should help the industry to contain its underwriting deficit, non-life insurers, will still have to make a conscious attempt to control their claims ratio, stated Crisil.