Insurers offer non-tariff bait

The marketing ploy "" buy one and get one free "" followed by FMCG companies is now being adopted by insurers. Nestle India, with a turnover in excess of Rs 2,000 crore, recently renewed its marine risk cover almost free, for Re 1, since it bought a fire policy of over Rs 1 crore from the same insurer.

Cross-subsidisation has become the buzz word in the insurance industry today. Highly rated corporates can bargain rates provided they source their profitable tariff policies, such as fire, from the same insurer.

Fire insurance covers, which are tariff policies, are profitable businesses since the prices are fixed by the Tariff Advisory Committee (TAC) and claims are lower than the fixed premium charged by insurers.

In contrast, premium rates on non-tariff policies such as marine, group health and group personal accident covers, tend to vary widely from company to company. These covers are used as a carrot by insurers to capture 'profitable' corporate fire portfolios.

"We look at the client profitability as an entire package. Wherever regulations permit and based on the profitability of the customer, we offer better rates even if it means under-cutting competition," said a senior executive with a leading private sector general insurer.

He said the phenomenon is also practiced by public insurers, which also offering quotes on marine covers at Re 1.

This is an indication of what one can expect to see when the insurance sector is detariffed. That is, when the TAC will allow market forces to decide the premium rates.

National Insurance Company bagged a 30 per cent share of Reliance Industries' Rs 40,000 crore cover, up from 5 per cent last year. The price of the cover, largely a fire policy, is fixed. The insurer is also underwriting the liability cover for Reliance Infocomm's cellular phones, which is a non-tariff policy.

There is rampant under-cutting in rates in non-tariff business, which is used to garner the more profitable tariff business. "In non-tariff business there has not been much appreciable growth owing to intense competition," said R Beri, chairman and managing director of The New India Assurance Company.

Rates on non-tariff covers such as marine, group health and liability policies have fallen drastically. Heavy incentives in cash and kind were earlier passed on to bag tariff business.

Today this practice has been replaced by cross-subsidisation of non-tariff business where insurers quote a token premium just for the sake of charging corporates in exchange for the tariff business.

A senior corporate official said with intense competition, "there has been substantial reduction in premium of non-tariff businesses especially marine cargo."

This is an international practice and well within the Indian regulatory framework, he added.