The Hindu Business Line : Private general insurers' tariffs are lower than PSU counterparts

The undercutting was in certain specific risk cover policies relating to strikes, riots and civil commotion (SRCC). The tariff floor fixed for this policy by the regulator's Tariff Advisory Committee is 0.0225 per cent per mille (2.25 paise for every Rs 1,000 sum assured).

The undercutting was done by quoting this floor for the SRCC covers and simultaneously including marine risk free of cost into these covers. Marine risk falls under non-tariff category.

The sources said that the public sector tariffs on the SRCC covers were higher than those quoted by the private sector. Besides, the four PSU insurers treat marine risk as separate covers.

The higher rates quoted by the PSUs were after taking into account the claims experiences the respective policies and the cost of reinsurance, they added.

The sources said the private players were resorting to undercutting to grab a larger share of the fire insurance business. Fire risk covers were sought-after business by the private sector in view of the high profitability from the low claims ratios. Claims as a per cent of the premium collected in fire insurance business is barely 55 per cent. This implied that 45 per cent were retained by the insurers. Besides, private sector companies had also changed business tactics, the sources said. Most of them are now focussed on bottom line growth as against the past strategies of top line growth.

The pursuit of bottom line growth was prompted by the need to improve the capitalisation of the companies in order to improve their retention capabilities and also their respective solvencies, the sources said.

Such business practices have begun driving down ceding commissions, the sources said. By ceding some of the risks to reinsurers, primary insurers earn a commission, which was as high as 22 per cent in the case of Treaty business. In non-treaty business, which includes, Facultative Reinsurance (Covers taken outside treaty reinsurances on the basis of individual risks), ceding commissions are already zero.

There are also fears within the industry that the ceding commissions could become negative in the coming months as had happened in 1993. Commissions comprise a significant portion of insurers' income flows. This was because a substantial portion of the SRCC policies are ceded to the domestic and international reinsurers.

However, if the tariffs quoted by the insurer are not acceptable to the reinsurer, they always have the right to refusal or insist on higher premiums in line with their Probable Maximum Loss estimates.

This was also one of the covenants in all the treaties between insurers and reinsurers. Reinsurers have already raised objections to the low tariffs quoted for SRCC risks, the sources said. As result some of the private sector insurers, would be faced with the prospect of absorbing the negative ceding commissions.