Fixing the minimum premium price: The insurance cartel may just be back

IRDA usherd in true competition by abolishing the Tariff Advisory Committee in 2002

Heads of leading general insurance companies in India are quite busy these days. That’s understandable as business is booming (the non-life segment is growing at a fast clip of nearly 30 per cent), but there is another reason for their super-hectic schedule. They are meeting each other quite frequently these days (the last such meeting was held on Saturday last week) to fix a minimum premium pricing for a diverse set of industries so that competition doesn’t harm any insurance company.

Participants at the Saturday meeting comprising both government-owned as well as private insurance companies agreed to give some discounts for lower loss ratios on agreed high rates. For large risks, it was decided to introduce discounts on account of favourable loss ratios for the last five years according to an agreed slab.

Such moves are quite unusual, to say the least. With the opening of the insurance sector in 2002, the Insurance Regulatory and Development Authority (IRDA) did usher in true competition by abolishing the Tariff Advisory Committee, allowing each insurance company to independently price the risk. Under the earlier tariff regime, minimum ratings were set out for each risk along with the rating methodology.

But 15 years later, insurance companies have joined hands to bring back the earlier tariff regime to kill competition. This has been done in two phases: First, effective September 1, 2016, all non-life insurance companies agreed to adhere to a minimum premium pricing for eight industries — pharmaceuticals, steel, auto, chemical, fertilisers, airports and power. The industry also decided that the expiring lead insurer would notify other insurers about claim experience of previous years. 

Since the informal arrangement suited everybody, it has now been decided that effective March 1, 2017, the list of industries would expand to cement, paper, tyres, information technology and software development parks. 

The cartelisation has brought in expected results. Clients have seen their renewal premium go up an average 50-100 per cent (in some cases above 500 per cent) as no insurance company is willing to give pricing below the informally agreed formula. 

People connected with the industry say a self- governance committee comprising representatives of five leading general insurers are collectively deciding the pricing of risk and this is followed by all others when they quote to their clients. In short, everybody is making hay as the consumer is left with no choice.

To be sure, no formal circular has been issued by any regulatory body or the General Insurance Council or any association of insurers as it will not stand the scrutiny of law. But there is no need for any formal arrangement anyway as long as it suits all insurers. However, the question that arises is whether this “coordination” of product design and premiums, the uniform wordings on policy documents and identical premium rate should not invite the attention of the Competition Commission of India (CCI), which has earlier been quite proactive in the cases of the cement, tyre and insurance industries. After all, the latest move by insurance companies is nothing but gross violation of free competition and would lead to jacking up the prices every year.

To be sure, this is not the first time that the insurance industry has been accused of cartelisation. Ironically, the first such instance had the finance ministry’s blessings. In 2012, the ministry asked all government-owned insurers to “necessarily share data concerning premium, claims, etc, with respect to major accounts and ensure that there is no competition between them in any corporate/group account”.

The letter warned that “any deviation from this instruction will be viewed seriously.” Following this, all the four state-owned non-life insurers quietly adopted a strategy of “joint consultation” before underwriting any big risks.

The second instance was in 2015, when the CCI slapped Rs 671 crore penalty on four state-run insurance companies for cartelisation and indulging in anti-competitive practices. The order followed a probe by the CCI into charges made through an anonymous letter that the four insurers rigged the bids submitted in response to tenders floated by the Kerala government for selecting an insurance service provider for the Rashtriya Swasthya Bima Yojna. 

Under the Competition Act, 2002 (Act), “bid rigging” refers to any agreement, between enterprises or persons engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

The CCI trashed the argument put forward by the insurance companies that since each of them was wholly owned by the government, they constituted a single economic entity and that therefore, an allegation of cartelisation was unsustainable against them, and said that the insurance companies did not constitute a single economic entity because the regulatory intent of the government was for them to act independently and to compete with the private operators in the insurance sector to offer better services to consumers.

The 2015 case was taken up by the CCI suo moto following suspicions raised in certain quarters that the four insurers “held meetings prior to submission of bids in response to the tenders” and manipulated the process. 

Will history repeat itself?