Detariffing set to hit general insurers' underwriting profit

The lifting of controls on insurance premium for fire, engineering and motor risks with effect from January 2007 is likely to cause a dent in underwriting profits of general insurers.

The fall in premium rates is expected for fire and engineering insurance covers as public sector insurers would become aggressive in protecting their turf from private sector rivals, which would try to grab the opportunity to increase their market shares, insurance experts said.

Insurance premium for loss-making commercial vehicles and third-party liability covers within motor insurance are expected to rise. The four public sector general insurers suffered a loss of around Rs 4,000 crore on their motor portfolios in 2005-06.

Immediately after insurance markets got detariffed elsewhere in the world, there were sharp falls in premiums. This phenomenon is likely to happen in India too, said officials of general insurers.

Since around 70 per cent of premiums currently come from tariffed products, a reduction in premiums for these products would cut down overall premium for an insurer, resulting in lower underwriting profits.

The first round of detariffing in India had happened with the marine hull risk in 2005. This led to almost 40 per cent fall in premium rates as all general insurers were grappling to get businesses.

General insurers suffered a combined loss of around Rs 3,000 crore on account of monsoon floods in 2005-06. Despite the losses, fire premium rates dropped in 2006-07.

K Krishnamoorthy, head - underwriting at Bajaj Allianz General Insurance, said: "It is expected that reduction in rates would be more in the fire portfolio since most companies would try and get more share in this portfolio, which will bring down the rates. Similarly, the private car portfolio, which is profitable for insurers, could also witness more reduction in premium rates."

"Rates will come down across all segments. Irda said it would monitor and ensure that there are not any premium wars. The regulator will also see to it that premium rates increase or decrease by 20 per cent only so that the financial stability of an insurance company is maintained," said Dalip Verma, managing director, Tata-AIG General Insurance Company.

M Ramadoss, chairman of Oriental Insurance Company (OIC), differed. He said, "It will be suicidal for insurance companies to sell cheap. Premium rates will rise for miscellaneous products like group health mediclaim, third-party motor and high-end vehicles, while they will fall for fire."

OIC suffered an underwriting loss of Rs 750 crore as the insurer saw higher claims in the health and motor business, besides settlements of claims by victims of last year's floods.

"So, we will increase premium rates in some portfolios and reduce them in others. Long-term players will give preference to their bottomlines. In the motor portfolio, each public sector insurance company is losing around Rs 400 crore and, combined, we are losing Rs 2,000 crore. We will want to recover from the price band. In the process of recovering, they will leave fire and engineering worth a Rs 700 crore portfolio for us."

Avered Sandeep Bakshi, managing director and CEO, ICICI Lombard General Insurance: "For a temporary period, there could be a slight arrest on the underwriting profit, but over a period of two years, detarriffing will start contributing positively to the underwriting profits and market will grow significantly. Post-detariffing, motor premium rates will remain largely the same. Fire and engineering polices will see a reduction in premium rates, while health and marine premium rates will rise."

In course of lowering premium rates and making losses, insurers may end up breaching the solvency margin.

IRDA Chairman C S Rao said: "We expect insurance companies to do sound underwriting. If they lower their rates and make underwriting losses and are not able to maintain the solvency margin, they will have to infuse additional capital. So, it is up to them. I, therefore, don't think they can lower their premium beyond a certain limit."