The Hindu Business Line : Insurers shift focus to retail risk cover

Bangalore, Sept. 17 Hamstrung by income pressures and mounting capital requirements, private sector insurance companies are shifting focus to retail risk products.

ICICI-Lombard General Insurance Company Ltd has made significant progress with a retail focus to become the fourth largest insurer in the country, with an annual premium income of about Rs 4,000 crore. This has given the impetus to other players to train their attention on the retail space.

Bharti Axa General Insurance Company’s Chief Executive Officer, Mr Milind Chalisgaonkar, says: “We will not be looking much at corporate business. We will look at under-insured areas, urban retail, rural and retail lines.” Bharti Axa is promoted by private telecom operator Bharti Enterprises and the Axa group of France.

Private insurer interest in retail was partly driven by the steep drop in premium income, after the tariff regime was dismantled last year. Deregulation has resulted in premiums falling as much as 60 per cent in low loss businesses, such as fire and engineering. Loss ratios in fire accidents, as represented by the claims, were as low as 55 per cent of the premium collections.

Reinsurance

Besides, to meet solvency guidelines, insurers had in the past resorted to reinsurance capacities, both within the country and outside, earning hefty ceding commissions. The insurance regulator’s prescribed solvency for domestic insurance is currently 150 per cent. Solvency implies the excess of capital and value of assets over insured liabilities. Ceding implies sale of primary insurers’ liabilities to a reinsurer at a commission.

Reinsurance premiums are once again on the ascent, for property and liabilities. Reinsurance terms are beginning to harden with the deepening of financial woes of global insurers such as AIG. Low domestic premiums have shrunk commissions to barely 10 per cent and are no longer attractive, the sources said.

The retail drive, the sources added, was also driven by fears that capital support from international parents was unlikely to flow as liberally as in the past. Unlike public sector insurers, the private sector has little reserves to shore up capital.

Besides, the international partners of domestic insurance companies have been hit by the meltdown in the global credit and financial markets. The focus, consequently, was on improving the efficiency of capital.

De-risking mechanism

Retail insurance, however, is a small-ticket and low-loss business. Capital requirements, as a result, are low. According to insurance broker India Insure’s Director, Mr C. Radhakrishna: “Retail focus is essentially a de-risking mechanism. The retail sector is an untapped market with large growth potential.” Currently, non-life insurance cover was less than one per cent of the country’s Gross Domestic Product. Better profits from retail would help insurers improve respective capacities, Mr Radhakrishna said.

But, even in retail insurance, insurers exercised caution. This was especially after large flood losses in Maharashtra two years ago. Private sector insurers are fixing geographical exposure limits on the basis of actuarial assessments of the Probable Maximum Loss (PML) ratio.

This ratio indicates the potential liabilities of insurers in a potential risk event. Even after factoring PML ratios, the sources added, loss ratios in the retail sector were expected to be well under 50 per cent, implying high retention premium and high profits.

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