The finance ministry has asked the general insurance companies to do away with the policy of under-pricing the risks for the sake of getting larger business volume. It wants them to hike premium to the pre-detariff era to boost profitability and improve the combined ratios that are hovering around 120 per cent.
The move assumes significance considering a possible rise in the premiums in certain lines of business like fire, motor, health and property by 25-80 per cent if the state-owned insurers follow the suit.
“These companies have been asked to come out with new underwriting policies which would price the risk adequately,” a source said. “The ministry is of the opinion that one of the main reason behind increasing loss ratios is the discount in pricing offered by these companies.”
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Four state-owned non-life insurance companies —National Insurance, Oriental Insurance, New India Assurance and United India Insurance —made a loss of Rs 6,500 crore in 2011-12. Of this, the motor insurance segment accounted for 50 per cent. These four players account for more than 55 per cent of the total Rs 47,000 crore non-life insurance market in India.
Besides, GIC Re, the designated national reinsurer made a loss of Rs 2,450 crore. Over the last three years, four state-owned non-life insurers have made a loss of Rs 15,000 crore.
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De-tariffication kicked in from 2008, leading to a fierce price war among the insurance players, resulting in decline in premium rates by 50-90 per cent in different policies. “Premiums is certain segments have reached unsustainable levels, which is the reason behind mounting underwriting losses for companies,” according to a senior official at a general insurance company. “The state-owned companies have been dependent on investment income for profitability, but that too is on the wane owing to the economic downturn. For instance, fire and engineering lines have seen premium correction of close to 50-80 per cent, whereas motor has witnessed a correction in rates close to 40 per cent since de-tariffication.”
However, senior officials at public sector general insurance companies remained coy on increasing the premiums to such an extent, as they fear that would give advantage to the private sector peers.
“We have been offering discounts to procure business,” said a senior official at a state-owned general insurance company. “Indian market is very competitive. A stiff increase in prices would impact our business volume. The extent of the hike in premiums might be dependent on the market forces.”
Over the last few months, the finance ministry has been nudging these insurers to curtail their expenses and improve efficiency to shore up their operating margins. GIC Re has been asked to stay away from loss-making portfolios like motor and group health.
“Non-life insurance companies must see that they maintain profitability along with the growth,” Financial Services Secretary D K Mittal had said. “It should not happen that they are growing and making losses.”
Accordingly, the reinsurer has linked its ceding commissions to the performance of the insurers. Besides, the ministry had also mandated these four companies to rationalise its loss making branches and nearly 50 per cent of their branches are loss-making.
“As much as 50 per cent of the branches of the general insurance companies suffered operating losses in at least three out of last five years,” the ministry said in a recent letter. “There is concentration of branches in major cities. We are suggesting there should be some rationalisation. They should go to unserved areas.”