Private insurers on a high

Six of eight private insurers post profit in three years of setting up shop.

Six of the eight private general insurance players in India have posted a net profit within three years of setting up shop, making this possibly the biggest private enterprise success story in the financial sector.

To put this into perspective, when private general insurance companies entered India at the end of 2000, they had reckoned that they would need five years to break even. Private life insurance company executives had then said their break even period was 7-10 years.

The list of profitable general insurance companies this year includes Reliance General Insurance Company, Iffco-Tokio Marine General Insurance Company, Bajaj Allianz, ICICI Lombard, Tata AIG General Insurance Company and Royal Sundaram Alliance Insurance. Other private insurers have yet to post profits are confident of joining their ranks in 2004-2005.

Reliance and Iffco-Tokio broke even in year one. On March 31, 2002, Reliance declared a net profit of Rs 7.35 crore. By the second year, ICICI Lombard joined the list, posting a profit after tax of Rs 0.7 crore in the first half of 2002-2003.

In 2003-2004, three more private general insurance companies made a net profit: Bajaj Allianz (Rs 32 crore), Tata AIG (Rs 15 crore) and Royal Sundaram Alliance (Rs 8 crore). ICICI Lombard's net profit for 2003-2004 was Rs 42.2 crore. The profitability figures of Reliance and Iffco-Tokio are not available.

Strikingly, the private general insurance companies also raised their market share from 9.46 per cent (Rs 1,349 crore in absolute terms) in 2003 to 14.21 per cent (Rs 2,290.69 crore) in 2003-2004. In the first month of 2004-2005, their market share zoomed to 20.44 per cent.

Three main reasons account for this success story: the customer-orientation of the private general insurance companies (bringing service to the doorstep of retail consumers); their ability to zero in on profitable accounts; and their focus on profitable businesses like fire and property insurance.

The new entrants introduced the concept of undertaking risk management for corporate clients. This enabled them to make inroads into many profitable corporate accounts of state insurers.

"Private insurers have been able to make profits because the volume of policies issued increased, thereby enabling them to leverage management expenses," said Bajaj Allianz General Insurance Company CEO Kamesh Goyal.

Better spreads and reduced claim ratios also contributed to companies making profits far ahead of the five-year time frame, he added.

The new companies introduced facilities like point of sale issuance of policies, cashless settlement of motor repairs (payment is settled directly by the insurance company) and SMS alerts on motor claim status.

They have also tied up with automobile manufacturers and played a major role in educating the general public on insurance benefits.

Royal Sundaram Alliance Managing Director Antony Jacob says the company is gearing up to tap the SME market, looking at small offices, hotels, restaurants, and shops. Tata AIG General CEO Dalip Verma agrees that the future lies in retail business because hardly two per cent of the country's population has been tapped.

The same six out of the eight private general insurance companies have completed at least three full years of operations.

"Our targeted premium income for the fifth year was achieved in the third year itself, which led to our making profits much ahead of our projections," said Goyal.

With the exception of ICICI Lombard and Bajaj Allianz, companies which have posted profits have done so because of the returns on their investment.

That is, they made profits by investing in in the money market (government securities, for example), in equity and so on -- in a falling interest rate scenario. ICICI Lombard posted an underwriting profit (total premium minus claims and expenses) of Rs 16.8 crore during 2003-2004.

The profits on investments are regarded as a cushion and do not reflect the performance of an insurance company. Average yields on investments are hovering at around six per cent, aiding new insurers in booking profits at least on investment income, if not underwriting performance.

Royal Sundaram managed to exceed its profitability target by Rs 1 crore in 2003-2004, with its bottomline touching Rs 8 crore.

ICICI Lombard is planning to hit the market with an initial public offer (IPO). One reason ICICI Lombard has been so profitable is the board's decision to double the company's share capital to Rs 220 crore last year.

With more capital, the company could retain more risks on its balance sheet without having to reinsure these risks, explains CEO Sandeep Bakshi. "By enhancing the retention capacity, we hope to increase the per risk retention figure by 70 per cent," he added.

However, the blip in this story is that the non-life insurance market's growth rate fell in 2003-2004, with gross premium income increasing by 10 per cent (from Rs 14,642.52 crore in 2002-2003 to Rs 16,118.39 crore as on March 2004), down from 21 per cent in 2002-2003 (from Rs 12, 095.95 crore).

Also, in March 2004, when many corporate accounts came up for renewal, state-owned insurers bagged most of the business. As the Insurance Regulatory and Development Authority's (IRDA) figures suggest, state insurance companies managed to jack up their premium income by Rs 201 crore in March out of the total figure of Rs 279 crore. The private players managed to garner just Rs 78 crore.