The Hindu Business Line : Insurers' revenues may drop 40 pc on detariffing

The Insurance Regulatory and Development Authority has indicated that phased detariffing could begin as early as January next year. Industry sources said that the regulator had indicated fire and engineering risks could be the first risks for detariffing.

As a result, the sources, said that industry-wide revenues could fall as much as 40 per cent. This was because competition in the fire and engineering risk cover portfolios could drive down premiums. The regulator, through its Tariff Advisory Committee, currently administers the premium rates in these portfolios.The Chairman and Managing Director of the country's second largest non-life insurer, National Insurance Company Ltd, Mr V. Ramasaamy, said, "There will be a fall in revenues if tariffs drop. But how much, it is difficult to hazard a guess."

Competition

Both fire and engineering risk covers are already witnessing cut-throat competition among the 12 public and private sector players, despite the administered rates. Some are offering discounts despite the floor rates fixed by IRDA. The discounts to entice customers away from public sector or their existing insurers are largely driven by profitability.

Fire and engineering sectors are profitable since the claims in both these sectors are low. Average claims in the sector have seldom exceeded 55 per cent of the premiums collected during the last five years. This implies that insurers get to retain the remaining 45 per cent of the premiums collected.

While the discounts may have pushed up business volumes for some, it has been at the cost of bottom lines.

One reason for this situation is that private sector insurers are almost entirely driven by the reinsurance markets, given their low retention capacities. At least 80 per cent of the business is currently reinsured, either treaties or on a spot basis with international reinsurers.

Commissions take a knock

But with severe undercutting of business, ceding commissions have taken a knock. In fact, there are fears that in the facultative (where reinsurance is done on a case-to-case basis), the commissions are already negative.

Given this situation, there is little possibility for capacities to improve unless capital could be brought in by the promoters. Not many private sector promoters, both Indian and foreign, are enthusiastic about bringing in more capital, at a time when the industry outlook itself is becoming bleak.

Says ASL Insurance Brokers Chief Executive Officer, Mr J.K. Bhagat, "The focus will therefore shift from top line to bottom line. It may have already begun."

Some re-pricing is quietly beginning to take place, particularly of medical and other loss making covers. Besides, some PSU and some private sector players are beginning to cherry pick. If risks are under priced, these insurers simply don't bid. Few want red ink on their bottom lines.