"Our survival is at stake," laments K.N. Bhandari, chairman and managing director, United India Insurance Company Ltd.

"We have to rework our business plans," bemoans a prospective entrant.

While the average rates will be reduced, there will also be a rationalisation in the fire insurance risk covers. Which means that premiums for some risk categories will actually rise. While the reduced rates have become effective 1 May 2000, those policy holders who have to pay an increased premium (a miniscule minority) have been given a year's time to pay the new tariff.

Though the reduction in fire insurance premium rates has been in the air for some time, the industry has been caught unawares by the quantum of reduction.

Bottomlines squeezed!
While the overall fire insurance portfolio should still remain profitable, the profits will be smaller. Traditionally, fire insurance portfolios have cross-subsidised losses suffered in other lines of business, mainly motor insurance.

The high fire insurance rates have helped insurance companies manage losses resulting from the rate wars in marine insurance business. They have also helped them neutralise the impact of the high losses in the motor insurance business.

In the year ended 31 March 2000, the Chennai based United India booked an estimated Rs 600 crore (against Rs 548.17 crore in the previous year) premium income under its fire portfolio, out of a total premium income of Rs 2,400 crore. In 1998-99 the four subsidiaries of the General Insurance Corporation of India together raked in Rs 2,137.48 crore as fire insurance premium, out of total premium income of Rs 8,754.13 crore.

Investments will be hit
With the reduction in rates in the current year, the industry's premium income will shrink drastically. Worse, this will have a cascading effect on the industry's investment activity. All four general insurers derive net profits mainly due to their investment income rather than their core insurance activities. "Yes, our investible funds will get reduced," agrees Mr Bhandari. The insurers will also have to contend with falling interest rates, which too will affect their investment income.

But Mr Bhandari believes that total investment income will not decline from earlier levels. "Only the yield rate will get reduced", he opines. That won't be a new thing. The yields on investments by general insurers have been on a downtrend.

For instance, United India, according to Mr Bhandari, earned Rs 500 crore from its investment activity in 1999-2000. However its yield rate is expected to be lower than the 12.26% registered in 1998-99. In 1997-98 the mean yield was 12.60%.

Worst affected
Of the four insurers, New India Assurance Company Ltd and United India are likely to be hit hardest by the fire tariff revision. In 1998-99, United India earned Rs 548.17 crore from fire policies, and New India Rs 682.18 crore. In comparison, National Insurance and Oriental Insurance Company Ltd, earned Rs 449.03 crore and Rs 458.46 crore from this source.

Also, United India and New India's client base consists mainly of big companies, where the fire rate reductions are the steepest. As a result, these two companies will be hit harder by the reduction in fire rates.

"Insurers' survival will be at stake if motor insurance rates, mainly for commercial vehicles, are not revised upwards," A. Rengarajan, deputy general manager, Cholamandalam Investment & Finance Company Ltd, Chennai. Cholamandalam is negotiating with Axa of France with a view to entering the general insurance industry.

The tale of woes for the four public sector insurers doesn't end with fire premium reduction. They will be hammered further from fiscal 2001 onwards, when the proposed across-the-board hike in agency commission to 15 per cent comes into effect.

Currently, insurance companies pay agency commissions that ranges between 5 and 15 per cent, depending on the class of business procured by them. They don't pay any commission on business placed by companies with paid-up capital of Rs.10 lakh or more. Instead, they offer a 5 per cent discount on the premium, in lieu of agency commission. This facility will be withdrawn from April 2001 onwards.