The domestic insurance players could soon see themselves being downgraded as has been the case of many leading global players by Standard & Poor's and Moody's off late.

Moody's associate rating agency in India, Icra has expressed concern over the future profitability of state-owned general insurance companies.

This is even as the rating agency reaffirmed a triple A rating of all the four state insurance companies.

Icra reaffirmed the AAA ratings assigned to National Insurance Co Ltd, Oriental Insurance Co Ltd and United India Insurance Co Ltd, indicating highest claims paying ability.

The Indian insurance market is on the threshold of change with competition intensifying, and move towards pricing deregulation in certain lines of business.

This will put pressure on the future profitability of public sector general insurance companies and could result in the downgrading of the companies, stated Icra in a press release.

It has thus urged that the companies focus on underwriting quality, control expenses and improve claim management and settlement practices.

"Ability of these companies to demonstrate tangible improvements on these key value drivers will be critical to support the assigned ratings at the current level," Icra warned.

Icra expects pressure on profitability on account of increasing competitive pressures, re-pricing of investment portfolios at lower yields, continuing pricing insufficiency of motor third party business, high management expenses and likely increase in business sourcing costs.

"Prospect of detariffing in the medium term is likely to considerably alter the dynamics of the general insurance business in India and present challenges to the public sector companies," it stated.

Greater underwriting prudence, control over expenses and improvements in claim management systems will emerge as key value drivers for these companies, believes Icra.

The public sector insurance companies have so far maintained sound operating and financial positions on the strength of the oligopolistic nature of competition, not to mention their national presence, sovereign ownership and established reinsurance arrangements.

Their financial strength has been reinforced by their strong investment portfolios, built during periods of high interest rates.

However, as investment portfolios mature, there would be a need to refinance this with relatively low yielding investment options, which would impact their future profitability.

Icra is also concerned about the underwriting profitability of the companies, as indicated by their combined ratios, which in the case of NIC and OIC remains average.

Icra attributes this chiefly to the pricing insufficiency of the motor business, in particular the motor third-party business, where pricing remains regulated, as well as the high expense levels of these companies.