Non-life insurers may find the going tough in a free market

MUMBAI: Once the non-life insurers survived the dismantling of the tariff regime in January 1, it was widely believed that the worst was behind them. But if anything, the going is only getting tougher for them. Developments like removal of floor rates, freedom to structure new products and half a dozen new entrants are expected to dramatically change the general insurance landscape in 2007-08.

In January, when the general insurance tariff was dismantled, the regulator announced floor prices for various businesses to avoid a rate war. “The de-tariffing actually turned out to be a re-tariffing of the industry, with new lower rates replacing the old tariff,” said an insurance official. Now, the insurance regulator has indicated that the floor rates would be removed during the year, and insurers would be free to state their price. Secondly, dismantling of the tariff was not liberalisation in the true sense, since insurers were asked to retain the terms of cover in force during the tariff regime.

Indian companies are now barred from issuing motor policies which provide for a replacement vehicle when the insured car is in the garage following an accident. From next year they will be able to provide such covers — as is the practice in many foreign countries — and there will be competition in the true sense.

The real disruption will, however, come from the new entrants, and renewed aggression by incumbents, including Reliance General Insurance. Three banks — Allahabad Bank, Indian Overseas Bank and Karnataka Bank — are partnering Japanese insurer Sompo for a joint venture in non-life insurance, where Dabur will also be a partner. HDFC, which recently broke up with Chubb, is looking for a new partner and is keen on being among the top three.

The country’s largest bank, State Bank of India, has decided to get into general insurance and is looking out for a partner. The Future Group (Pantaloons), which has tied up with Italian insurer Generali, is also expected to start business during the current fiscal. Among others Bharati Axa, which is already in life, is expected to start selling general insurance this year.

The worst affected by the competition would be the public sector. Last year, government-owned companies saw their market share fall from 73% to 65%. The largest state-owned company, New India Assurance, saw its market share fall 3% to just over 20%. ICICI Lombard, on the other hand, has seen its market share rise from 7.79% to 12%.

The entry of public sector banks into the scene will hit New India the hardest, since many of them are selling New India’s products. Insurance officials say that public sector companies could lose their leadership position during the current fiscal unless the private sector undertakes a course correction following underwriting losses. Already there are signs that private sector companies are becoming selective in accepting business. ICICI Lombard has opted out of several loss-making group mediclaim policies. Sources said that ICICI Lombard has given up some group health accounts in May, resulting in a drop in premium.

The competitive pressures generated this year is expected to put severe pressure on the balance sheets of general insurance companies. In 2006-07, pressure on rates, due to free pricing, was felt for only one quarter. Although the non-life industry grew 22% to Rs 25,000 crore, the increase in premium actually hides the decline in margins. Insurance companies are exposing themselves to much higher risk at a lower price. But since the focus has shifted to stock market valuations, few companies are looking at the bottomlines as of now.