Insurers' discounts may push up reinsurance rates
Taking last year’s premium and claims paid as a benchmark for the simulation, the reinsurer has told insurance cos that claims for this year could touch as high as 130%.
By Priti Patnaik, TNN |
NEW DELHI: General Insurance Corp (GIC), the national reinsurer that takes on risks from general insurance companies, is anticipating hardening of reinsurance rates starting April 2008. It is understood that GIC has conducted simulations based on the discounts given on policies in the engineering and fire portfolios since January 2008.
Taking last year’s premium collected and claims paid as a benchmark for the simulation, the reinsurer has told insurance companies that claims for this year could touch as high as 130% of the premiums collected, up from a claims ratio of 60% last year. The portfolios were traditionally low on loss for insurers.
This indicates that insurance companies are giving huge discounts to even bad risks in the portfolios. While companies are allowed to offer discounts up to 51.25%, some have even given discounts more than this for relatively greater risks. GIC officials were unavailable for comment and did not respond to email queries.
Experts believe there is going to be a restraint on reinsurance capacity going forward because of supply-side constraints. “GIC is expected to tighten reinsurance rates. Price rationality is bound to prevail sooner than later. The market will be hardening and it will face a correction starting April. This will impact the supply side,” an industry expert said. Already, GIC is only entitled to 10% of the cession by domestic insurers starting April, down from 15% last year.
Industry sources said large risks are being offered up to 70% discount, medium risks around 50% discount and small risks up to 30% discount. Though the premium pie will have grown over last year, the absolute number of expected losses are estimated to be higher because the underlying risk has grown more. The reinsurer is expected to hike facultative quotes. Facultative reinsurance is an arrangement where the reinsurer has the right to accept or reject individual risks.
Taking last year’s premium collected and claims paid as a benchmark for the simulation, the reinsurer has told insurance companies that claims for this year could touch as high as 130% of the premiums collected, up from a claims ratio of 60% last year. The portfolios were traditionally low on loss for insurers.
This indicates that insurance companies are giving huge discounts to even bad risks in the portfolios. While companies are allowed to offer discounts up to 51.25%, some have even given discounts more than this for relatively greater risks. GIC officials were unavailable for comment and did not respond to email queries.
Experts believe there is going to be a restraint on reinsurance capacity going forward because of supply-side constraints. “GIC is expected to tighten reinsurance rates. Price rationality is bound to prevail sooner than later. The market will be hardening and it will face a correction starting April. This will impact the supply side,” an industry expert said. Already, GIC is only entitled to 10% of the cession by domestic insurers starting April, down from 15% last year.
Industry sources said large risks are being offered up to 70% discount, medium risks around 50% discount and small risks up to 30% discount. Though the premium pie will have grown over last year, the absolute number of expected losses are estimated to be higher because the underlying risk has grown more. The reinsurer is expected to hike facultative quotes. Facultative reinsurance is an arrangement where the reinsurer has the right to accept or reject individual risks.
| | | Also Read |
| | à | |
| | à | |
| | à | |
| | à |
“Already, the insurers have a matrix to work with. They know the history of the customer. Discounts on good risks will be cross-subsidised with bad risks,” an official from a private non-life company said.
Prudent Insurance Brokers vice-president P S Dhingra said, “Detariffing is meant to free up pricing but it is also meant to result in low rates for good risks and high rates for bad risks. Presently, the industry is indiscriminate in its discounting. We expect the market to behave more maturely post April 1. If the market does not self-correct, reinsurers will force it to.”
“The profit margin that GIC enjoyed will come down now since the discounts have increased. The claim ratios for the portfolios were 40-50% last year and are now 70%. I don’t think the claims ratio will be as high as 130%,” a top official at a PSU insurer said.
Recently, a senior GIC official had said, “Even though international reinsurers may take a stricter view on reinsurance rates based on current underwriting standards, GIC will be willing to offer proportionate covers. We do believe that in any detariffed market, premiums will first fall but the market will stabilise due to auto-corrective measures.”
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
