Detariffing to hit insurers’ profits from underwriting

KOLKATA: General insurers are set to witness a dip in underwriting profits as the industry is detariffed in January ’07.Detariffing will allow insurers to price their own products. Result: downward price adjustments in categories like fire, engineering and passenger vehicles to protect market share.

As prices decline, underwriting profits — the difference between premiums earned and the sum of claim expenses and underwriting expenses, are set to decline too. As much as 70% of premium income is from tariffed products hence the toll is likely to be heavy.

“This has been the experience world over. Underwriting profits have dipped every time a country migrated from a tariffed regime to a detariffed one. China, Australia, Germany and Italy are glaring examples. Prices as well as underwriting profits dipped immediately after these markets were detariffed,” Bajaj Allianz General Insurance chief executive officer, Kamesh Goyal told ET.

Having started operations only a few years back, most private sector companies are yet to register positive underwriting profits. The public sector ones are reeling under heavy losses from the commercial vehicle and group health insurance category. The situation is likely to aggravate once the industry is detariffed.

“We expect our underwriting profits, at Rs 27 crore in ’05-06, too, will take a hit once the industry is detariffed. Underwriting profitability of Indian general insurers are the lowest among Asian countries. Prices, however, are likely to stabilise in about a couple of years as the industry reaches an equilibrium,” he added.

Kolkata-based National Insurance has already readied itself for the situation. “As prices of profitable segments like fire, engineering, and passenger vehicle decline, volumes would be beefed-up to make good the decline in underwriting profits,” V Ramasaamy, chairman-cum-managing director at National Insurance said.

Nevertheless, group health and commercial vehicle insurance are loss making proposition for insurers and premiums for these segment are likely to rise. At present, these are cross subsidised from the profitable segments. The subsidisation element is likely to be wiped off once the industry is detariffed.

However, their contribution to underwriting profits are likely to be minimal. Oriental Insurance’s CMD M Ramadoss said individual health insurance will also be a casualty. He is also banking on increased volumes to arrest losses. ICICI Lombard, which has targeted a 40% increase in premium income this fiscal, said, “Initially there would be pressure on margins which will ease out once rates stabilise.”