Solvency headroom, a bancassurance tender and a peak fire risk: board decisions for a mid-sized insurer
Trinetra General Insurance, a six-year-old private non-life insurer, reports gross written premium of ₹1,240 crore. Of this, 58% comes from a bancassurance tie-up with one mid-sized private bank; motor third-party is 34% of the book at a loss ratio of 121%; group health is 21% at 96%. Available solvency margin is ₹186 crore against a required solvency margin of ₹155 crore. Reinsurance is a 30% quota share on all business, a net retention of ₹12 crore per risk and a surplus treaty giving a further ₹45 crore per risk; the largest single fire risk on the books is a textile cluster exposure of ₹180 crore. The bank has told the insurer that from next quarter it will run a competitive tender and may move the portfolio to another insurer. The regulator has asked for a three-year capital plan. Three directors propose: (i) raise ₹250 crore by a rights issue; (ii) terminate the bancassurance arrangement now, on the insurer's own terms; (iii) write more motor third-party to grow the top line.
1. Compute the solvency ratio, quantify the headroom, and explain what it means for the Board's capital decision.
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Ratio. ₹186 crore ÷ ₹155 crore = 120% of the required solvency margin. The prescribed control level is 150%, so the insurer is already below it and the regulator's request for a capital plan is a consequence, not a surprise.
Headroom. The absolute minimum available margin is the required margin itself, ₹155 crore. The cushion is therefore ₹186 − ₹155 = ₹31 crore before the ratio reaches 100%, or 2.5% of gross written premium.
Why ₹31 crore is thin. The book carries a ₹180 crore single fire exposure and a motor third-party portfolio with a 121% loss ratio on ₹421.6 crore of premium - a ₹88.5 crore underwriting loss before expenses. One large fire loss net of reinsurance, or a three-percent deterioration in the motor third-party reserve estimate, would consume the entire cushion. Solvency headroom here is not a buffer; it is a coincidence.
Implication. The Board cannot choose between raising capital and improving the risk profile - it needs both, and the capital plan should show the ratio being rebuilt above 150% through retained earnings, not only through fresh equity. A ₹250 crore raise alone would take available margin to ₹436 crore (281%), which is more than the business can deploy and heavily dilutive. A raise sized at roughly ₹90–120 crore, paired with the reinsurance and portfolio actions, gets above 150% with less dilution.
2. Evaluate the three director proposals, with numbers and reasoning.
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(i) Rights issue of ₹250 crore. Solves the ratio arithmetically (₹436 crore available, 281%) but not the cause. It also takes months - shareholder approval, filings, subscription - during which the ratio stays at 120%. A staged raise of ₹90–120 crore, with the balance conditional on repricing the motor book, is better governance: it does not reward the existing mix with unlimited capital.
(ii) Terminating bancassurance pre-emptively. The bank supplies 58% of ₹1,240 crore, i.e. about ₹719 crore of premium. Losing it would strip the insurer's expense absorption and probably push the combined ratio into loss before any alternative channel matures. The real defect is concentration, not the relationship. The proportionate response is to negotiate on a non-exclusive basis, build two alternative channels within 18 months, and set a board limit - say no single partner above 35% of premium - rather than walk away first and lose the argument.
(iii) Writing more motor third-party. This is the most dangerous proposal. At a 121% loss ratio, ₹421.6 crore of motor third-party premium is already producing roughly ₹88.5 crore of loss before expenses; growing the line grows the deficit and the long-tail reserving risk, and motor third-party pricing is tariff-constrained, so volume cannot be bought profitably through price. It also consumes solvency capital rather than generating it. Growth here should come from risk selection - vehicle class, geography, claims history - not from volume targets.
3. The ₹180 crore fire risk is up for renewal. Test whether the insurer can retain it within its treaty capacity and recommend an approach.
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Tower arithmetic. The 30% quota share cedes ₹54 crore, leaving ₹126 crore on the insurer's own account and under the surplus treaty.
Own capacity per risk = net retention ₹12 crore + surplus treaty ₹45 crore = ₹57 crore. Because only 70% of the risk flows to the company's account after the quota share, that ₹57 crore supports a gross risk of ₹57 ÷ 0.70 = ₹81.4 crore.
The ₹180 crore line therefore exceeds treaty capacity by ₹180 − ₹81.4 = ₹98.6 crore. That gap must be filled by facultative reinsurance, or the line cannot be written as proposed.
Recommendation. Do not retain the line and hope the treaty responds - a loss above treaty capacity falls straight on the solvency margin, which has only ₹31 crore of cushion. Three workable routes: (a) place about ₹99 crore facultative before binding, and decline the line if it is not fully placed; (b) reduce the line to ₹81 crore and ask the insured to coinsure the balance with another insurer, which preserves the relationship without breaching capacity; (c) restructure with an excess-of-loss layer over the treaty, if the pricing supports it. Whichever route is chosen, the accumulation must be checked against the textile cluster as a whole, not this single policy - several insureds in one industrial estate can produce one loss event that pierces the tower from several directions at once.