On their way

The new private sector general insurance companies have proved the potential of the Indian market. Six of the eight players have been able to make profits within three years of starting operations in the country, and they are giving the established public sector giants a run for their money by grabbing one-fifth market share in quick time.

This vindicates the government's decision to open up the insurance sector to private (including foreign) players, and the endless controversy that preceded this decision now stands exposed as having been counter-productive and indeed pointless.

One important reason for the quick profits was the opportunity provided last year by investment and treasury operations. But it is also true that growth in premium income for these companies has been well above expectations.

Also, while a loss of market share by the public sector players is only to be expected, the rate of gain of market share by the private insurers has been rapid. It's worth noting that profitability has been achieved despite comparatively low volumes; as volumes increase the high initial infrastructure costs will be spread out across a larger number of accounts, adding to profitability.

That doesn't bode very well for the public sector insurers, and as a matter of fact business growth for three of the public sector non-life insurers has been a poor 2 to 4 per cent in 2003-04.

Critics would say that one reason for the quick success of the private players is their concentration on lucrative areas, leaving loss-making segments such as third party motor insurance to the public sector units. There is truth in that assertion "" private players have indeed concentrated on profitable businesses like fire and property insurance. On the other hand, public sector players cannot say no to loss-making businesses like third party liabilities in motor insurance. At the same time, however, there is no doubt that private sector players have been able to bring in a new level of customer service, the point of sale issuance of policies being a case in point.

They have also been able to bring in new products and have contributed towards increasing awareness of the need for insurance. It would be wrong, therefore, to say that the private insurance companies have merely skimmed the cream.

As a matter of fact, they have been hobbled by their small capital from effectively competing for large corporate business. At the same time, the entry of private sector players has benefited corporates, who have been able to take advantage of cross-subsidies offered to them.

For instance, insurers have been willing to quote rock-bottom rates on marine insurance for corporates who place large amounts of other business with them.