Insurance firms hike rates after GIC Re changes policy on fire risk pricing

Insurance rates for vast swathes of Indian industry have begun to rise after languishing at historic lows for several years. The turnaround began in April after India’s leading reinsurance company, GIC Re, refused to entertain business from general insurers in cases where they have quoted rock-bottom rates.

Now, insurance companies will not be able to buy reinsurance cover for their underwriting unless they follow responsible practices. Under Indian insurance rules, domestic insurers have to make the first offer of reinsurance to government-run 

GIC Re. So, if GIC Re is of the view that the companies have failed to price their risks responsibly, they will not get reinsurance cover. This will force them to make higher provision for their risks, thereby hurting their profits. While India is on course to becoming an important global hub for the insurance business, it has one of the lowest insurance rates in the world for several classes of risks, notably fire. In a notice to all the 34 general insurance companies, GIC Re has said that the pricing of fire risks for every category of industry, including power plants, steel plants, textile mills, plastic units, and rubber goods manufacturers, needs to undergo a steep rise. A company source said that after studying the impact of the new rules, they could be extended to other lines of business too.

The key businesses of insurance companies are health, motor, and fire insurance. Of these, fire accounts for 7 per cent of total gross direct premium of Rs 1.50 trillion in 2017-18 (FY18).

Reinsurance companies around the world do not usually instruct insurance companies on the pricing of risks. That changed with the GIC Re circular, moving it into a quasi-regulatory position. GIC Re has stiffened its position also because it is a listed company since October 2017. 

Shareholders could ask difficult questions if underwriting losses came home. P Joseph, former member (non-life) at Insurance Regulatory Development Authority of India (Irdai), told Business Standard that the GIC’s step was a welcome one. “Discounting in fire business had even affected cover for natural catastrophe risks, where it should have been a strict no-no”. 

Insurers are expected to price their risks prudently because otherwise they would end up paying out more money as claims than they would earn as premium. Still, because of the cut-throat competition in the Indian general insurance space, firms have slashed rates in every line of business, making the margins wafer-thin. In several cases, the rates are running with discounts of 99 per cent.   

Now that GIC Re has taken the lead in pushing up rates, foreign insurers will follow suit. For them too the costs have risen as they (along with GIC Re) provide reinsurance cover for about 31 per cent of the fire premium. If companies acquire the business at low rates, they will struggle to buy reinsurance cover, which is bad news for the reinsurers. “GIC Re had to protect itself as well as the domestic insurance industry,” says Joseph. In FY18, the aggregate underwriting loss of the general insurers in India was Rs 15,341 crore. So while the general insurance business has grown by over 17 per cent (compound annual growth rate) in the past decade, few companies have managed to show any profit.

The race to the bottom has not spared even the four government-run general insurers. United India Insurance has practically stopped issuing any fresh policies, especially in group health segment, as its solvency ratio has dipped to 1.21 as against a minimum prudent ratio of 1.5.