STATE-OWNED non-life insurance companies are expected to have an upper hand when floor limits on rates for property insurance are removed. Some insurers have already started quoting 60% on the erstwhile fire insurance tariff rates to acquire profitable business from January 2008.
Last week at a meeting with chiefs of general insurance companies, insurance regulator Insurance Regulatory and Development Authority (IRDA) agreed to remove all floor limits on pricing from January 1, 2008. Following the dismantling of tariffs in early 2007, the regulator asked companies to observe a floor limit of 51.5% of discounts on fire insurance. Companies wanted the floor limits removed so that they could offer cheaper rates to very low-risk customers.
“Public sector companies have an upper hand in pricing because of their strong net worth and the relationship they have with treaty reinsurers,” said First Policy Insurance chief operating officer P Sachidanand.
He said while rates for fire insurance and motor ‘own-damage’ would come down, premium for health insurance, marine cargo and liability insurance would go up. A senior official with a state-owned company said stateowned companies would fight back to gain their lost market share. Also, most of the public sector companies are short of their business targets for the current fiscal, and would try to regain market share through aggressive pricing.
Although IRDA has said post-detariffing, prices should be able to generate an underwriting surplus for companies, many are forecasting underwriting losses. Fortunately, for PSU insurers, all of them are generating a good surplus through their investment income and rising asset prices. “Low rates can come back to haunt you. If an insurer becomes too aggressive, reinsurers may decide not to renew their treaties in case of large underwriting losses,” said the chief of a private insurance company. Treaties are annual reinsurance contracts between insurers and reinsurance companies where the reinsurer blindly shares in the profits or losses. Besides fear of losses and non-acceptance by reinsurers, companies would also be restrained by their boards. A wider mandate for boards follows the insurance regulator’s decision to allow non-life companies complete freedom to price all insurance covers from next year.
“We have made out a case for the regulator to approve market wordings. This will drive innovation in their product design and better pricing,” said General Insurance Council secretary general KN Bhandari, an umbrella body for non-life insurers. At their meeting with the regulator last week, non-life companies had recommended pushing ahead the deadline for free pricing to January 1 to ensure a smooth transition of major renewals that would come up in April, next year. “The market will take a few months to stabilise after free pricing is ushered in. But we do not expect rate wars among companies as prices have already bottomed out”, said Bhandari.
According to a senior IRDA official, companies will be given a free hand to design products and fix premiums according to their under-writing policies. The regulator will not set bench-marks for pricing policies and the caps on discounts that insurers can offer will go. IRDA will unveil the file and use guidelines for general insurers under the free pricing regime shortly, said the official. But general insurance companies will have to follow scientific underwriting policies and keep the insurance regulator posted on this