Detariffing to hit insurers' margins
Detariffing will increase underwriting losses of insurance firms since benefits from the increase in motor (TP) third party premia may not be sufficient to completely offset the impact of cut in premia in other profitable areas, according to ratin...
By TNN |
MUMBAI: Detariffing will increase underwriting losses of insurance firms since benefits from the increase in motor (TP) third party premia may not be sufficient to completely offset the impact of cut in premia in other profitable areas, according to rating agency Crisil.
Competition in profitable businesses such as fire and engineering is expected to intensify, translating into lower premium income. Income from motor TP insurance is likely to improve as players will increase premium rates to cover future expected claims more efficiently.
It may be recalled that with effect from December 31, ‘06, Irda has allowed detariffing of certain segments of general insurance business. Simply put, it has allowed general insurance companies to fix their own premium for certain general insurance products. Crisil expects the core business operations of industry players to remain unprofitable over the medium term.
Nevertheless, it expects strong capitalisation levels of general insurance companies to continue to support their business in a detariffed regime. This will enable them to meet unexpected losses and service large claims that may devolve on them.
Over 70% of net premium in the domestic general insurance industry is generated under tariffed lines of business. All insurance segments, except personal lines of business — health and personal accident — and marine cargo insurance, fall under the tariff structure of the Tariff Advisory Committee (TAC).
The Crisil study, covering 12 public and private companies, has worked out various scenarios in different tariff structures. A 10% reduction in fire, engineering, and motor OD premia, accompanied by a 20% increase in motor TP premia, will increase the industry’s underwriting losses from Rs 1,771 crore currently to Rs 2,070 crore in the near future.
While a 10% reduction in fire, engineering, and motor OD premia, accompanied by a 100% increase in motor TP premia, will reduce the industry’s underwriting losses from Rs 1,771 crore currently to Rs 574 crore in the near future, but it feels that this scenario is not very likely, given the sensitive nature of motor TP premium and its widespread impact which would restrict the level of premium increase in this segment.
While the core business operations of general insurance companies will remain unprofitable, over the long-term, margins in fire and engineering segments are likely to stabilise and move up as the industry matures, thus supporting overall profitability levels.
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