Financial Strength Ratings
With the non-life insurance sector opening up to private participation, eight new players have commenced operations recently.

This is expected to intensify the competition in the industry. In such a scenario, an insurance company’s ability to pay claims, which is reflected in its Financial Strength Rating (FSR), will influence consumer preferences.

An FSR is determined after analysing all the factors that can influence an insurance company’s claims-paying ability. The key drivers of the FSR are:

* Business Risk: The company is assessed on parameters that drive its relative business position in the insurance industry. While arriving at a company’s business risk rating, Crisil also factors in the risks associated with the external environment, that is the insurance industry in which the company operates.

* Financial Risk: The company is assessed on parameters like capitalisation and profitability that determine its relative financial strength vis-a-vis other players in the industry.

* Parentage: This parameter evaluates the parental support that is available to an entity.

The key parameters used to assess each of these drivers is given below:

The New Non-Life Insurance Players
Following the opening up of the insurance industry, eight new private sector players have entered the non-life business.

Of these, six are joint-ventures between well-known Indian companies and business groups and global insurance players. The other two have been promoted by large Indian business groups (see A profile of the new non-life players).

The Financial Strength Rating Of the New Non-Life Players

Nascent operations will constrain business risk profile Operations at a nascent stage: Most of the new non-life players began operations in FY 2001-02. Thus, the initial focus has been on setting up infrastructure and systems. Apart from establishing offices, recruiting employees and agents, the new players are also focusing on quickly expanding their retail reach by tying up with manufacturers, dealers, finance companies and banks that already have established networks.

Therefore, Crisil believes that it is too early to comment on their business risk profile.

In fact, the largest private sector player in FY 2001-02 was Bajaj Alliance General Insurance with gross premiums aggregating Rs 1.4 billion, which translated into a market share of only 1 per cent. (See Market share of Indian non-life insurance players)

Outlook: In Crisil’s opinion, the nascent operations of the new non-life players would limit their business risk rating. The incumbent state-owned non-life insurance players will continue to dominate the industry in the medium term.

Very limited track record will constrain financial risk profile
New players yet to establish financial profile: The new players have not yet established their financial risk profile since for most of them, 2001-02 was their first year of operations. Since they are still in the process of rolling out their business operations, Crisil believes that until their operations stabilise, it will not be appropriate to evaluate or compare their underwriting record, capitalisation levels and liquidity position.

Further, in line with expectations, most new players reported losses in 2001-02 though this is not an indicator of their future financial performance (see The new non-life players: How they fared in FY 2001-02).

Outlook: Crisil believes that the new players’ financial risk profile shall stabilise over the next few years. Only then will it be relevant to evaluate and benchmark them against existing players. In the short to medium term, however, their financial risk profile will be constrained by the absence of any track record. On the other hand, Crisil expects the state-owned players to maintain their strong financial profiles in the medium term.

Assessment Of Parent Support
Given the limitation to the standalone business and financial risk profile of the new players, Crisil believes that their parents’ support will be a key determinant of these players’ credit profile. According to Crisil, this support is currently available in the following areas:

Business Support: The new entities are receiving significant support in the form of underwriting and risk management skills, sales and marketing strategies, back-office and operations management. Key personnel from the parent are also part of the new players’ management team. In addition, these players will also be able to leverage their promoter’s brand image, local knowledge, business relationships and customer base. Entities promoted as joint ventures with foreign insurance companies will stand to further gain on account of the foreign parent’s global experience.

Financial Support: Crisil believes that the financial support would be primarily in the form of capital infusions.

This will be driven by the parents’ willingness and ability to infuse capital based on their financial strength, economic incentive to support the insurance venture and the significance of the initial and prospective investment outlay.

Since most new players are expected to report losses in the initial years, they would need to recapitalise to continue to meet the strict solvency margins stipulated by the regulatory authority. In addition, event risks such as the September 11 incident could precipitate large scale capital requirement.

Conclusion
Crisil believes that an insurance company’s claims-paying ability, as reflected in its Financial Strength Rating, is an important element in consumer preference.

FSRs, which are very popular in developed economies, were unimportant in the Indian context earlier given the industry’s oligopolistic nature.

But Crisil believes that with the opening up of the sector, they will gain prominence at home as well.

While the state-owned non-life insurance companies enjoy high stand-alone FSRs due to their strong business and financial profiles, the FSRs of the new players, in the absence of any track record, will be primarily driven by their parentage.