Low reinsurance rates no help to insurers

Reinsurance rates have softened globally but domestic general insurers are unlikely to reap the benefits. This is because of a sharp fall in premium rates after the lifting of price controls, and also losses on account of catastrophes in the last three years.

"It is unlikely that Indian insurers will get reduced reinsurance rates because of the 2006 flood losses in Surat, Mumbai, Chennai etc. Moreover, detariffing will generally lead to reduced rates for insurers, which means for the same or higher exposure, insurers will get lesser premium," said Dhananjay N Date, managing director of Indian subsidiary of the world's second-largest reinsurer Swiss Re.

Sanjib Chaudhuri, chief representative in India of Munich Reinsurance, the world's largest reinsurer, said: "Our (reinsurance) capacity is based on technical underwriting. Munich Re will continue with risk-based pricing like in the past."

According to Willis Re report, on January 1, the day when reinsurance treaties are renewed globally, reinsurance rates for property catastrophe fell in South East Asia 10 per cent on an average, but in exceptional circumstances up to 20 per cent. These were the largest rate reductions seen anywhere in the world on January 1. Rates also fell on property per risk contracts with good records. Besides rates have reduced for casualty and liability risks, though to a lesser extent.

Domestic insurers are also likely to lose a large part of the commissions they receive from the global reinsurers, which view the lowering of premium rates on detariffing as a deterioration in the premium to exposure ratio.

Reinsurers pay 30-45 per cent commission to insurers on fire business and a little lower on other classes of business, a practice that is unlikely to continue in a free pricing scenario. The reinsurers have been paying back part of the reinsurance premium as commission because the risks covered were highly profitable.

Experts said since detariffing had led to a fall in premiums by as much as 40 per cent, the challenge for domestic insurers will now be to renew their treaties on April 1 at the expiring rates, terms and conditions.