Moody’s: LIC IPO to boost transparency, governance

(This story originally appeared in on Jan 21, 2022)

MUMBAI: The listing of Life Insurance Corporation (LIC) and other government-owned non-life companies will bring about reforms in terms of better focus on underwriting & products, transparency, governance and risk management, according to Moody’s.

In an interview with TOI, Moody’s vice-president and senior analyst Mohammed Ali Londe said that any change that the initial public offering (IPO) will bring about in LIC would have an impact on the wider market as well because of the corporation’s 70% market share. “What we have seen elsewhere in terms of what happens after large IPOs is that the governance standards run through and through — the credit profile, the business they select and how they manage the assets and the risks. It becomes much more advanced or sophisticated,” said Londe.

He added that the benefits of listings would outweigh the pressures to focus on short-term on quarterly results. “I think what governance and focus on risk management does is that in terms of risk management heat map it brings all the risks on the table, whether it is short-term or long-term,” said Londe.

According to him, the three unlisted non-life insurers, which have been under pressure, have displayed an improvement in performance after a capital infusion by the government a couple of years ago. In March 2018, the state-owned non-life insurers had 46% of premium but 84% of underwriting losses. “Our figures show that as of March 2021, it dropped to 67% of underwriting losses, and for FY22 until June 2021 they were only 57% of underwriting losses,” he added.

Moody’s sees pricing inadequacy as a key driver for the weakness that was there among public sector non-life insurers. However, there has been a renewed focus on underwriting after the capital injection and this has an overall impact on the market in terms of competitive pricing. Moody’s sees an opportunity for the state-owned insurers to hold on to market share given that there is a lot of room for growth and the companies have an advantage in terms of geographical penetration and brand.

“They can make the retail segments tech-savvy through digitalisation and reduce acquisition costs to make it more profitable,” said Londe.While reforms in terms of listing, consolidation, or consolidating with an entity with better governance would be beneficial, a consolidation would only work if there were synergies to be had in terms of geographies, lines of business or operations. “If those synergies are to be had, then consolidation will make sense by going ahead and driving force to overcome operational hurdles. If those synergies are not available, we have seen a lot of M&A transactions fall through,” said Londe.

Moody’s sees the pandemic as being a big driver for the health and term insurance business, but expects the property and casualty business to pick up as economic activity gathers steam and more investments are made in metros, roads and other projects.