Insurers plan floor for fire cover to avoid large burns

Mumbai: Non-life insurers are considering a minimum rate for the natural catastrophe component of fire insurance after concerns that steep discounts in the segment could leave the industry and reinsurers exposed to mounting losses, people familiar with the matter told ET.

The issue was discussed informally in a recent meeting held last week, said the people cited above. No decision has been taken and the discussions remain preliminary, the people said.

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Industry estimates suggest that fire protection, although a relative straggler behind health and motor insurance, still accounts for 8-9% revenue for the general insurance business. In the April-July period, fire covers made up 8.4% of the premium collection by the industry.

The move to suggest a floor premium follows concerns expressed by the Insurance Regulatory and Development Authority of India (Irdai) chairman Ajay Seth over the financial health of insurers and their underwriting discipline following complaints of discounts of up to 99% on large industrial fire risks.

The regulator had said pricing for large industrial and commercial fire risks should be based on sound actuarial principles, as these are low-frequency but high-severity risks where a single claim may be many times the premium collected.

Under fire insurance pricing, the premium broadly comprises two components - the natural catastrophe (NatCat) rate and the flexible fire (Flexa) rate. The NatCat component covers the natural catastrophe risk of a particular location, while Flexa rates provide pricing based on the nature of the business.

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The proposal under discussion is that insurers should not breach the minimum prescribed NatCat rate, while a maximum permissible concession could be specified for the Flexa component. The exact limit on concessions for Flexa rates is yet to be finalised.

Predatory Pricing

The discussions follow concerns over aggressive fire insurance pricing, with some leaders questioning whether discounts on catastrophe-related pricing can be sustained. Recent fire losses in Gujarat have also added to concerns around risk pricing. The industry expects upwards of ₹5,000 crore claim from Gujarat floods.

"Natcat risk is not underwritten properly means you are completely playing with the fire," a source said, arguing that discounts should be restricted to the flexible component rather than the catastrophe component.

The proportion of NatCat and Flexa in the overall premium varies depending on the nature and location of the business. Higher-risk businesses such as chemical facilities could have a different pricing mix from relatively safer risks.

Reinsurers, which absorb a large part of the industry's risk, have also raised concerns over the pricing. Insurers typically retain only a portion of large risks and transfer the balance to reinsurers. Continued aggressive pricing could therefore increase losses for reinsurers even as insurers compete for business.

Premiums under the fire insurance segment fell 28% in the first four months of the financial year to ₹10,062 crore in April-July, compared with ₹14,063 crore a year earlier, industry data from the General Insurance Council showed, as aggressive discounting of large industrial risks weighed on premium growth.