The General Insurance Corporation of India (GIC) has said that it was downgraded for its financial strength rating by AM Best Company the worlds leading provider of ratings for the insurance industry owing to a change in its accounting policy for 2005-06. 
 
GICs balance sheet for the year had taken into account the premium income for the first nine months and estimated claims liability for the entire 12-month period. 
 
Last week, AM Best Company had announced that it had downgraded financial strength rating to A- (excellent) from A (excellent) and the issuer credit rating to A- from A. 
 
It also changed its outlook from stable to negative for GIC. The countrys sole insurer had been for the last five years receiving A (Excellent) rating from AM Best. 
 
AM Best said it viewed GICs combined ratio (claims and expenses put together) in most business lines as very high and believed that profits will remain entirely reliant on investment returns. 
 
Also 50 per cent proportion of equity held in the domestic market maintains GICs risk-adjusted capital position under pressure. 
 
GIC said it had changed the accounting policy so that the results and balance sheet could be finalised soon after the close of the financial year. 
 
The earlier policy of taking domestic premium up to March 31 of every year resulted in the results getting finalised only by July or August, as insurance companies have 90 days from end of each quarter to submit their accounts. Thus premium income from January to March 2006 would be accounted in the year 2006-07. 
 
Says R Chandrasekaran, general manager of GIC, So while the premium income of three quarters were taken, the claims liability was actuarially estimated up to March 31, 2006. The claims ratio was higher due to Mumbai floods and other catastrophes in 2005. GICs combined ratio went up to 121 per cent of the premium income. Most international reinsurers have logged similar levels of combined ratios in 2005. 
 
Chandrasekakran also said instead of measuring the investment in equities at their book value or purchase price, AM Best measured the market value of the investment in equities to total assets which worked out to 50 per cent as the share market has gone up during 2005. 
 
Based on the high combined ratio caused by catastrophe losses and the so called overdependence on equities on market value basis AM Best have down graded us, said Chandrasekaran. 
 
GIC also said it has sufficient capital and reserves. GICs premium income for 2005-06 is Rs 4,234 crore, it has a policyholders fund of Rs 9469 crore and a shareholders fund of Rs 4,759 crore. 
 
As compared to most international reinsurers GIC has a healthy premium: policyholders fund ratio of 1:2. Claim paying ability is the significant acid test for any insurer or reinsurer where we have AAA ratings from CARE, said Chandrasekaran. 
 
According to Chandrasekaran, foreign rating agencies do not give due weightage to standards as per local conditions, management and philosophy and grade purely on international parameters which is not right. 
 
But since we need foreign investments, we look at getting foreign ratings. Thus emphasising the need for an Asian or a regional rating system.