Covid-19: Irdai’s dividend challenge

April 28 2020 by Nick Ferguson

India’s regulator has urged insurers to retain dividends to ensure they have enough capital to withstand the effects of the Covid-19 pandemic.

While the move looks to be overly cautious, given the country’s low insurance penetration and the limited role of private hospitals in treating coronavirus patients, at least one life insurer has already reacted.

ICICI Prudential said over the weekend that its board had decided not to recommend any final dividend to shareholders for the financial year that ended on March 31 as a result of the regulator’s guidance, despite reporting just two Covid-19 claims.

With fewer than 1,000 deaths so far and a life market that is dominated by government-owned Life Insurance Corporation of India, the solvency of private life companies is unlikely to be threatened by the crisis — at least in terms of underwriting.

There are larger market risks, but while asset prices and interest rates have fallen in India, as they have in most markets, but not to a degree that is expected to threaten life insurers’ solvency.

“In the overall scheme of things on the health insurance loss outcome, we don’t see … a material impact on our portfolio experience.” Gopal Balachandran, ICICI Lombard

It is a similar story on the health side. Public hospitals, where the government is absorbing the costs, are at the forefront of the pandemic. Just 10% of the population have health insurance, which represents about 3,000 potential claims across the entire market, based on the 30,000 cases currently reported in India.

Gopal Balachandran, chief financial officer at ICICI Lombard, the country’s biggest private general insurer, has said the company’s potential exposure is just 800 to 1,000 claims even if the outbreak reaches a total of 100,000 cases nationwide.

“In the overall scheme of things on the health insurance loss outcome, we do not see that having a material impact on our portfolio experience,” said Balachandran, in a recent call with investors.

General insurers also face relatively minor exposure from other affected lines, such as claims related to travel and business interruption (BI).

New business
There may be a greater effect on premium growth. The national lockdown introduced at the end of March will have some effect on sales of motor insurance in particular, said Balachandran, but the flip side of that is a significant reduction in claims due to the deserted roads, as P&C insurers in China have already observed.

On the health side, face-to-face sales are clearly affected, but call centres are still open and the crisis is actually driving business.

“We have seen a spurt in the number of enquiries for health insurance policies, pretty much similar to the experience we see whenever a catastrophic event happens,” said Balachandran.

The lockdown may also help to reduce health claims for non-Covid-19 respiratory illnesses, thanks to lower pollution levels and unprecedented clear skies across the country.

“In view of the emerging market conditions, and to conserve capital with the insurance companies in the interests of the policyholders and of the economy at large, insurers are urged to take a conscious call to refrain from dividend pay-outs.” Pravin Kutumbe, Irdai

Even so, the letter sent on April 24 by Pravin Kutumbe, head of the regulator’s finance and investment division, reminded companies of their obligation to protect policyholders before paying dividends.

“In view of the emerging market conditions, and to conserve capital with the insurance companies in the interests of the policyholders and of the economy at large, insurers are urged to take a conscious call to refrain from dividend pay-outs,” he said.

Kutumbe added that the authority would review the guidance at the end of September.

Pressure
The Indian regulator’s message comes amid growing calls in other markets for insurers to show restraint in distributing profits.

Australia’s prudential regulator asked banks and insurers to consider deferring dividends and bonuses earlier this month. However, QBE went ahead with the announcement of its final dividend anyway and further emphasised the strength of its position a week later by successfully raising US$750 million in fresh equity.

Investors may remain confident, but QBE and several other insurers face further challenges in the UK in the form of policyholder litigation arising from the denial of business interruption claims. Hiscox, in particular, has become the focus of an organised effort by policyholders calling themselves the Hiscox Action Group, who claim that the wording of its policies covers business interruption losses from the government shutdown.

Needless to say, Hiscox has denied this is the case.

“Hiscox UK’s core small commercial package policies do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic,” it said in a statement.

If it is forced to back down on those denials, the level of exposure is not trivial. It has sold business interruption cover to about 10,000 businesses affected by government closures.

Even so, insurers such as QBE and its Indian counterparts are probably right to argue that they are not facing a solvency crisis. The question of whether or not to pay a dividend may come down to relationships with regulators and individual circumstances.

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