The Hindu Business Line : Premium detariffing could hit India's insurance rating

Testing times
Premiums on assets forecast to drop by 40 pc
Global reinsurers may review India risks
Reinsurance treaties to see hardening of terms

Bangalore , Sept. 7

With detariffing of premiums just months away, the country's international insurance rating is likely to come under pressure.

Barring motor and medical, premiums on assets are forecast to drop by at least 40 per cent in a detariffed regime, according to industry analysts. (At least 30 per cent of the industry's revenues come from fire, engineering and property risk covers.)

This is because intense competition in the industry would drive down premiums, sources said.

While this is likely to benefit large corporates, insurance companies' revenues would come under pressure, they added. Falling premium income without a concomitant reduction in claims is likely to bring down the profits and consequently the ratings, said highly placed industry sources. Currently, only the fire and engineering risks in the country are treated as profitable based on current tariffs.

Almost the entire component of the risks is currently reinsured, partly with the statutory reinsurer, General Insurance Corporation of India.

The remaining components are ceded to international reinsurers either on a treaty basis or through the Facultative Reinsurance basis. (Fac Re is an arrangement where individual risks are offered by the ceding insurer to a reinsurer, who has the right to accept or reject each risk.)

The sources said that the fall in premiums would result in a review of India risks by global reinsurers. Currently, almost all the global reinsurers are comfortable with India risk premiums in view of the Tariff Advisor Committee's prescribed rates, which functions as a floor.

A detariffed regime implies that the floor would vanish. Consequently, the sources said, the current levels of comfort of the global reinsurers would be adversely impacted.

Already some revaluation of the country's probable maximum loss ratio is under way after the recent floods in Surat and terrorist strikes in Mumbai.

Besides, global reinsurance markets are also unstable on fears of further unrest in West Asia, they added.

As a result, the sources said, reinsurance treaties coming up for renewal early next year are likely to see some hardening of terms.

Reinsurance premiums are unlikely to rise in the treaties, but the sources said that reinsurers are expected to impose ceilings on their treaty liabilities to contain losses.

For the remaining portion, the primary reinsurers would be driven to either the Fac Re or excess of loss reinsurance markets, where risk pricing is market determined.

This would also lead to a further compression in ceding commissions (commission earned by passing on liability to the reinsurer) from well-rated reinsurers.

Ceding commissions are already negative for most of the private sector insurers, the sources said.

Currently, domestic insurers are allowed to have reinsurance arrangements only with those reinsurers that have a minimum rating of BBB from Standard and Poor's.