Rising Covid claims will increase H2FY21 health loss ratios
Rising Covid claims against the backdrop of normalisation in non-Covid claims is set to put health loss ratios under pressure in H2FY21. While exponential increase in Covid claims will lead to cut in earnings estimates, well-funded insurers stand to gain market share in health insurance in the longer run.
* Covid claims on exponential rise: From US$24mn in June, claims in this segment have risen to US$362mn by end of August. The exponential increase is evident from the perspective that total Covid claim amount till June-end was US$75mn while July added US$78mn and August US$209mn.
* Till August, total Covid claim amount is estimated at ~11% of non-life health GDPI. Industry health GDPI till July has been ~Rs184bn while July health GDPI was Rs50bn. Assuming August was similar at Rs50bn, the total health GDPI till Augustend works out to Rs234bn (US$3.2bn). Hence, total Covid-related claims till Augustend was ~11% of the total health GDPI. It could be higher as a share of health NEP depending on reinsurance arrangements. However, industry reports suggest that reinsurers are hesitant to underwrite the Covid risk. This has been a major challenge for pricing of insurance policies covering Covid treatment.
* H2FY21 health loss ratios will worsen as non-Covid claims normalise. While non-Covid claims have been lower in H1FY21, the non-Covid counterpart is reportedly close to pre-Covid levels now. Even if we assume that Covid claims maintain a run rate of US$150mn per month from September, the total FY21 Covid claim amount would be ~US$1.4bn (Rs105bn). At 5.5% health market share (Q1FY20), ICICI Lombard (ICICIGI) FY21 Covid claim would be Rs5.7bn. Assuming ICICIGI retains 80% of its health business, accountable Covid loss could be Rs4.6bn. While some reserving may have already been done (75% loss ratio in Q1FY21 vs 70% in FY20), increasing Covid claims pose upside risk to this estimate.
* Insurers with strong balance sheet will gain health market share. It follows from the above that ICICIGI will structurally gain despite lower profitability in FY21. In many ways, non-life insurance industry is at a cyclical trough (no motor TP price hikes in FY21, persistent pressure in motor OD rates, lower auto sales and higher health loss ratios). High-quality private non-life players therefore stand to benefit more on cycle recovery
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