The Hindu Business Line : General insurance: Liberalisation has made little difference

Bangalore, Dec 28 Competition in the non-life insurance sector intensified this year after migration to a free pricing regime from January. As a result, tariffs across all sectors dropped. The competition was intense in the fire and engineering covers because of low claims ratios in the sector. Consequently, this sector has been the bone of contention between the four public sector and the 8 private sector insurers.

But for the first time since the non-life insurance market was opened, public sector insurers were in a position to flex their muscle. Tariffs in the low claims segments – fire and engineering – have dropped by at least 50 per cent. In fact, during the year, public sector insurers were planning to push down the tariffs even lower by offering discounts in excess of 60 per cent. They were in a position to do so, in view of the large capitalisation. The combined capitalisation of the four PSU general insurers is close to Rs 20,000 crore. Accordingly, the reduced tariffs would have a negligible impact on the solvency.

However, the regulator intervened. The Insurance Regulator and Development Authority (IRDA), in September, called a meeting of all the non-life insurers and capped the maximum discounts on tariffs to just 52.5 per cent.

There were rumbles in the insurance markets, especially among the PSU insurers that the regulator was biased. One public sector insurer asked, “Where was the need for a regulatory cap, when the reinsurance tariffs would itself act as a floor?” PSU insurers felt peeved at the IRDA’s stance. This was because since the opening up of the insurance sector, private sector players have nibbled the shares of the lucrative business, both fire and engineering by offering discounts. PSUs on the other hand were in fact left with the high loss business, especially motor third party, where the claims were as high as 200 per cent of the premium collected.

Private sector insurer’s market share that was barely 4 per cent in 2001 is currently about 40 per cent. PSUs saw market pricing as an opportunity to correct the situation. The IRDA’s floor though is now the major hurdle.

No significant growth

However, the sector has not shown any significant growth, in tandem with the galloping gross domestic product. The compounded annual growth rate between 2001-02 and 2006-07 of the general insurance sector was about 15 per cent, which is less than the nominal growth of the GDP. Besides, as a component of the GDP, liberalisation appears to have made little difference. General insurance coverage remains at an abysmally low 0.5 per cent.

Yet, despite the shortcomings, reforms have begun taking effect. Oriental Insurance Company Ltd, for instance has become the first PSU to become compliant with Section 40c of the Insurance Act. This statute restricts management expenses to a ceiling of 19.5 per cent of gross premiums. The ceiling is inclusive of dividends, commissions and wages. Several private sector insurers have fallen short of the statute despite their five-year reprieve ending in March 2007. Some in fact have sought an extension.

Margins turn positive

Besides, this year most PSU insurers have brought their underwriting margins into the black after a long time. Private sector insurers since day one have had positive margins. Underwriting margin is a measure of profitability of the insurance sector. Underwriting margins of the PSU insurers have been negative for more than a decade. But this year PSU insurers are expected to end the fiscal with positive margin of about 2 per cent. Accordingly, insurers’ core business itself would become positive from this financial year onwards and reduce the reliance on non-core income to buttress the net profits.

The reason for this change was partly on account of the IRDA initiative in setting up a Third Party motor insurance pool. This pool has assumed a large part of the PSU insurers’ losses. This pool was created by the participation of all the 12 insurers in both public and private sectors.

Ride on stock markets

Booming equity markets have allowed insurers the opportunity to book profits. PSU insurers have so far booked profits in excess of Rs 700 crore for each of them. But they have used the resources to shore up their general reserves and consequently their capital. The focus was to build up capital for further expansion of business in the coming year, and prepare for further reduction in tariffs. Insurers are expected to maintain a solvency margin – the excess of the value of the assets and capital over the insured liabilities – of 150 per cent.

Capitalisation vital

Insurers have taken this move also in view of the new norms coming into effect. Insurers moved into dynamic solvency standards. Currently, the sector is submitting its solvency report on a half-yearly basis. In migrating to this standard, insurers have taken the asset values prevailing at the end of September 30 for computing their solvency.

But to sustain the current growth phase of 15 per cent, insurers now need additional capital. This is particularly because the global reinsurance markets have tightened, in the wake of the sub-prime crisis. This would imply that treaty terms next year are likely to become adverse. Public sector reliance on cross-border reinsurance is about 20 per cent. Private sector reliance on reinsurance is about 50 per cent. Consequently, if capacities have to be sustained, capitalisation is of critical importance.

Although the Government has in principle cleared the amendments to Insurance Act, the amendments are yet to be passed.

Private sector insurers are also pushing for increasing their capital through an increase in the foreign direct investment to at least 49 per cent from the current level of 26 per cent. But with underwriting in the black, initial public offerings by the non-life insurance sector now appears imminent.

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