The Hindu Business Line : Free pricing to see lower premium rates: Swiss Re

The free price regime to debut on January 1, 2007, in the Indian non-life insurance market will bring in a substantial reduction in premium rates, according to Swiss Re, one of the world's largest reinsurers. The main beneficiaries would be the large corporates. Currently, fire, engineering and motor insurance are under tariff (administered rates).

Mr Thomas Hess, Chief Economist, Swiss Re, said a price reduction could be substantial in certain segments and there was a threat of reinsurers being forced to support such price wars.

"As a reinsurer, we look at price deregulation with mixed feelings. While in the long-term, deregulation is beneficial for the insurance industry, in the short-term, it causes price wars and turmoil, which reinsurers may not be in favour of," he added.

Mr Clarence Yeung, Head, Southeast Asia and India, Swiss Re, clarified they would have to review contracts of insurance companies on an individual and portfolio basis. The financial health of the company was crucial to Swiss Re's reinsurance support.

Globally, the free-price regime has brought in shifts in market share, created polarisation and stirred up a wave of consolidation, according to Swiss Re. With price volatility, companies would have to make sure they are adequately capitalised.

Gainers

Big corporates are most likely to benefit from the price reduction. "Major corporate houses have the volume and the clout to secure reductions in rates. In retail, the targeted segments will be charged lesser than the non-targeted segments," said Mr Dhananjay Date, Managing Director, Swiss Re India.

He said that while the PSU general insurance companies had larger balance sheets, the private companies were computerised and quicker in terms of decision-making. "In the property insurance line of business, private companies have made inroads and they will grow at the expense of PSUs," he said.

According to Swiss Re, initially companies would see higher loss ratios and the need for proper reserving to maintain solvency would become crucial. "The whole value chain of insurers have to be re-evaluated including pricing, claims handling and distribution," said Mr Hess.

Global trend

Detarrification or free-pricing in the insurance sector is a global trend. In Japan, for instance, it was a phased process over two years (July 1998-June 2000). It led to product innovation where insurers even introduced savings-type motor policies. While insurers initially resisted lowering prices, intense competition eventually led to a price decline.

Mr Hess said Chinese regulators adopted the trial and error method to usher the free-price regime. Following a pilot project in Guandong in China, motor rates were deregulated in the rest of the country from Jan, 2003. While the motor loss ratio increased by 10 percentage points to reach 60 per cent in the first quarter of 2003, the premium rate declined by 16 per cent.