Venkatachari Jagannathan looks back at the private non-life insurance industry's first five years, and its prospects for the future

It has been a momentous first half-decade of life for India's eight private non-life insurers. Not only have they had to contend with each other, but also take on the four government-owned giants. In addition they have had to manage relationships with the 23 third-party administrators that process health insurance claims, insurance brokers, corporate agents and banks that sell insurance policies.

Looking back,Insurance Regulatory and Development Authority (IRDA) chairman C S Rao says, "The non-life insurance industry has seen 180 per cent growth in these five years, writing a gross premium of Rs18,095.25 crore in 2004-05, up from Rs10,087.03 crore in 2000-01. The private players have come out with innovative products including weather index-based crop insurance policies, health insurance covers, liability products and others." (See: Get ready for next phase of reforms).

Cholamandalam MS General Insurance managing director Arun Agarwal adds, "Cashless benefits in health and motor insurance claims management, exclusive product lines for small and medium enterprises (SMEs) and extensive innovation in product design, especially in retail lines, are testimonials to the industry's customer-centric approach." Some insurers have also started issuing policies online.

Much of the industry's growth happened in the motor and health insurance segments. On the other hand the fire, miscellaneous and transit insurance portfolios of corporates migrated partially or even fully from government companies to private insurers.

Following the Kolkata-based National Insurance, private companies too started tying up with vehicle manufacturers and dealers to get captive business. Vehicle makers and dealers saw a sudden jump in their non-core revenues, as private insurers started making better deals. Today, even government companies are following the private insurers with similar offers.

Among the private players, ICICI Lombard General Insurance became an object of envy as it was able to leverage its pedigree - it is a subsidiary of the ICICI Bank - to get business.

Bajaj Allianz General Insurance also grew at a faster pace. During FY 2005, the company logged 79.53 per cent growth. Unlike their counterparts in the life insurance segment, some of the private non-life insurers have already hit the profit path.

The eight new players have already captured a market share of 19.65 per cent. This share will go up further, as public sector undertakings are now insuring their assets with the private insurers. As a matter of fact, IRDA insures its assets with a private insurer.

However, government companies have often cried foul at the private insurers. There have been a few instances in which private players were pulled up for violating the tariff advisory committee's (TAC) premium structure.

Some companies also indulged in other questionable activities like offering higher commissions than the stipulated rates; summarily avoiding insuring heavy vehicles; providing cover only to the vehicles and asking customers to take third party insurance from one of the four government companies, and the like.

Former CMD of Oriental Insurance and industry analyst G V Rao says, "Public sector units have not really changed their thinking and continue living in the past. Private players want shortcuts to premium building. Neither of them is looking at the future or at the customer. Government companies, particularly, have lost an opportunity to rebuild their organisations.

This could well be true. Two government companies offered ridiculously low terms for insurance cover to Reliance Infocomm (cover against non-payment of bills by telecom subscribers - a trade and business risk) and found themselves laden with several crores of rupees worth of claims - at a time when Reliance General Insurance itself was an active player in the market.

But that is the industry trend. There are industrial groups that place their loss-making business - like motor insurance - with government companies and only their profitable business with the group's non-life insurers.

Low retention
If market share were measured in terms of net premium (gross premium minus reinsurance premium paid), the private players would rank further down. During the initial couple of years, the risk retention level of many private players was negligible. In fact, companies earned sizeable revenues from reinsurance commissions, and were sort of glorified reinsurance brokers.

The retention levels of insurers are related to the kind of business an insurer underwrites. For those with corporate clients, the reinsurance premium outgo is higher than for companies with sizeable motor and other retail insurance business. Bajaj Allianz General Insurance CEO Kamesh Goyal says, "In retail the retention is high, while in the corporate segment, the retention is low for a start-up company."

According to IRDA, for the year 2003-04 the retention level of the eight private players in the fire, marine/transit and miscellaneous (including motor) segments was 22.30, 42.48 and 60.44 per cent respectively. The reinsurance business placed abroad by the industry is higher than what is retained by the direct insurers and the General Insurance Corporation (GIC), the national reinsurer.

But even here, some private companies do not follow the regulations. For instance, the regulations stipulate that if a domestic non-life insurer decides to reinsure with a foreign reinsurance company, the latter should have at least a BBB credit rating from Standard and Poor's, or a similar rating from other credit rating agencies. Some insurers do not follow this stipulation.

Says the IRDA chairman, "The IRDA has granted approval for these arrangements subject to the condition that those reinsurers will either get themselves rated or will not be utilised for placement of reinsurance."

Another trend in the market is that large corporates with huge asset bases directly negotiate with the overseas reinsurers first, and then place their business with a domestic non-life insurer with the condition that the reinsurance placement should be with a particular company. IRDA has recently issued a circular that such practices are not correct.

The circular says, "It is the function and responsibility of the insurance company to choose the appropriate reinsurer/s within the framework of the regulations. The Authority will therefore not permit any insurer to dilute this function and responsibility by permitting the broker or the insured to specify conditions with regard to reinsurance placements or leaving the choice of the reinsurers directly or indirectly to the insured."

The IRDA chairman expects India to emerge as centre of reinsurance hub for the South Asia. "With increasing liberalisation, there could be a reduction in obligatory cessions." Presently, all insurers have to compulsorily place 20 per cent of their reinsurance business with GIC. This is known as the compulsory/obligatory reinsurance cession.

Despite the liberalisation of the sector, no company - foreign or domestic - has come forward to set up a reinsurance company. Foreign players want to transact business by opening branches here, citing the Rs200 crore start-up capital as a stumbling block.

In reinsurance, perhaps for the first time, the domestic non-life insurance industry experienced the impact of a loss happening elsewhere. Following the 9 / 11 attack on the World Trade Centre, global reinsurers declined to provide cover for terrorism risk. The Indian industry then decided to form a terrorism pool.

Looking forward for multiple whammies
While the first five years has been eventful, the coming years will be exciting too, as the IRDA has announced its road map for detariffing. Simply put, this will mean freedom from the administered price regime.

Premiums for general insurance policies are fixed by two bodies - the tariff advisory committee (TAC) and individual companies. The TAC fixes the premium rates for motor, fire, marine (hull), workmen compensation and engineering business portfolios. These are called tariff business, constituting nearly 70 per cent of the total market. (See: Is insurance detariffing headed towards a dead end?)

"The roadmap is good and brings out IRDA's expectations. Our company would have preferred a much faster detariffing than is given in the roadmap," says Shrirang V Samant, CEO, HDFC Chubb General Insurance. The private players are excited about detariffing, regardless of its multiple impacts on their top and bottomlines. In a free pricing regime, the premium rates are expected to fall. This in turn would reduce the fund availability for investments.

The other whammy is the increase in brokerage and agency commissions. Currently, the brokerage and agents commission in the case of non-tariff business is 17.5 per cent and 15 per cent respectively, and in the case of tariff business it is 12.5 per cent and 10 per cent respectively. When the rates are freed, payments to intermediaries will go up.

"Market trends will change if there is detariffing. Otherwise, things will continue to go in a straight line. If detariffing happens, a few players will probably go bankrupt in about three years, or merge with bigger rivals. Detariffing will also create more consumer-related problems for all initially," G V Rao remarks.

Adds former CMD of New India Assurance and a member of A C Mukherji Committee K N Bhandari, "The premium rates in India are the lowest, and the only way they can go is upwards." He feels pure competition in a free market is a myth, as the players will always come to some sort of informal agreement.

Further, distribution costs have gone up from 5 per cent to 15 per cent after the sector was thrown open. Freeing the rates would result in a non-availability of insurance cover for some risks. Policyholders will also have to be ready for a further price hike.

But Agarwal differs, "Detariffing is the natural way for any market to grow. A free market environment encourages insurers to garner market share with improved product packaging, competitive pricing and superior service quality. The quality of competition in the market improves, benefiting the customer. Personal line and corporate business will both benefit equally from merit-rated business."

Goyal sees it a little differently, "We feel that de-tariffing would help insurance companies to come out with better products and segmentation of customers, which will help our retail customers more than any other segment. In the corporate segment, health and marine premiums would go up but fire premiums would come down. Overall, there will be no premium reduction."

Golden era for corporates
One sector that has benefited immensely from liberalisation is the corporate sector. Competition has resulted in premium rates going down. While the corporates are enjoying the benefits, individual policyholders haven't seen too much improvement, in terms of premium rates as well as claims settlement.

A normal individual takes the following policies - fire insurance for the house, burglary for household goods, householders' insurance, personal accident and mediclaim / health insurance, travel, motor insurance.

Mediclaim premium rates have gone up, thanks to the introduction of TPAs. For burglary and other personal lines of business, individuals pay much higher rates than corporates for the same cover - the cost of burglary insurance under a householder's policy is Rs2.40 per thousand; for corporates it may be as little as 0.01 paise. In mediclaim and personal accident cover too, corporates are able to get better coverage at cheaper rates than individuals.

In motor insurance, prospects are shooed away by insurers. Even government companies have started placing restrictions on insuring old cars and commercial vehicles. The insurers also charge vehicle owners over and above the stipulated premium rates.

The other important issue is the huge pending claims estimated to be around Rs15,000 crore - nearly the market size of the entire non-life insurance industry - because it is easier not to pay and generates more investment income. The IRDA's regulation for protection of policyholders is observed more in breach. Many companies, including government companies, deliberately delay obeying the orders of the courts or the insurance ombudsman.

Speaking about future growth areas, Agarwal predicts, "Retail lines have been recording a good growth rate. Specifically, growth in travel, health, personal accident, home insurance and liability look promising."

On market trends, Goyal says, "Players will focus more on market share than on profitability. This can be done through better risk profiling, as well as learning more about the risks through risk inspections and data warehouses."

Growth will also come from infrastructure segments like ports, roads, airport and the power sector, he feels. Credit insurance is another area that has a potential for growth, with increasing exports of services and products, as India is getting integrated with the global economy."