In a recent letter to National Insurance, Oriental Insurance, New India Assurance and United India Insurance, the ministry laid out a strategy for underwriting group health insurance policies. It said premiums on all stand-alone group health insurance policies coming for renewal this year should be revised upwards, keeping in mind the total expenses.
As the four non-life insurers are seeing a decline in net profit despite growth in premium, the government asked them to restructure their premiums and turn around loss-making branches.
The move has attracted sharp criticism from these companies, which have joined ranks with state-owned bank chiefs in accusing the ministry of “micro-management”.
They fear this would jack up insurance premiums of their customers, resulting in loss of business to private insurers.
“In a competitive environment, people reduce prices to get volumes. Pricing is not directed by one single player. The customer is now spoilt for choice. If some private company is giving a lower rate, he will switch over to that. Why should he pay higher premium?” said a top executive with one of the insurers.
The ministry had recently asked state-run banks to revisit their interest rates after the Reserve Bank of India lowered interest rates in April.
The ministry also asked the public sector insurance companies to stop undercutting each other to attract customers.
A PSU insurer won’t be allowed to take business of another state-run insurance company, if the sum assured is over Rs 100 crore for a fire insurance policy. The instruction came after the ministry noticed fire policies were issued at a discount of 80-85 per cent.
A shift within the insurance companies will not be allowed for group health insurance policies, provided the existing insurer gives his ‘no-objection’.
The companies have also been asked to analyse third-party motor insurance and exercise due diligence while offering such policies and increase premiums to pare losses.
The net combined losses of the four insurance companies on group health insurance were estimated at around Rs 1,500 crore in 2011-12.
“These losses are due to the lack of prudent underwriting and a very unhealthy and self-destructive inter-company competition among these four companies,” the ministry said in its letter.
The instructions outline how can these companies bring down their expense ratio and prune management expenses to improve profit. The ministry said the practice of giving heavy discount on premium to stanch business from other public sector company should be done away with.
The government, as a promoter shareholder, also advised public sector banks and insurance companies to make an action plan to turn around their loss-making branches. The ministry noticed that 50 per cent of their branches made operating losses in at least three out of last five years. The companies are expected to take the proposals to their respective boards.
“There is concentration of branches in major cities. We are suggesting there should be some rationalisation. They should go to unserved areas,” said a finance ministry official.