Insurance premium may not fall further

General Insurance Corporation negotiates lower commission, profit share with non-life insurers.

After falling for two years, non-life insurance premium rates are unlikely to dip in 2009-10, as the Indian reinsurer General Insurance Corporation (GIC) has hardened its stance while negotiating reinsurance arrangements for the next financial year.

During the first round of talks with non-life insurers, GIC said that it would pay at least 5 per cent lower commission on business that is reinsured with it. Further, it has sought a share in underwriting profits, which could be as high as 50 per cent, sources involved with the negotiations said.

Profit commission is paid by a reinsurer to an insurance company ceding business under a proportional reinsurance treaty that is dependent on the profitability of the total business in each accounting period. In the past, GIC had not paid any profit commission to insurance companies even if they make profit out of the business underwritten.
 

CLAIM RATIO Estimates for April-Sept ‘08
Segments	In %
Motor (OD+TP)	120
Motor (OD)	55
Aviation	100
Engineering	70-75
Health	112
Miscellaneous	112
OD= Own damage TP= Third Party

The move follows deterioration in the general insurance portfolio as a result of the fall in premium rates by more than 50 per cent over the last two years. Insurers offered discounts, which were up to 85 per cent of the normal premium rate, to garner business.

According to GIC’s estimates for the first half of the year, barring engineering, the other businesses have seen an adverse claims ratio. In other words, claims have been more than the premium earned and has resulted in underwriting losses.

With premium, which is the revenue for insurance companies, falling, the chances of underwriting losses go up. Over the years, general insurance companies have made up for the underwriting losses through treasury gains. “But this year, even the treasury income is under pressure and that has partly resulted in GIC hardening its stance,” an insurance company executive said.

The sources said that general insurers would return to the negotiating table in the early part of next month. In case, GIC continued to maintain a hard stance, the general insurance companies could seek international support. But executives said that globally too, reinsurance rates had hardened and could be forced to come back to the public sector reinsurance company.

While Indian companies have to mandatorily cede 10 per cent of the business underwritten by them with GIC, most companies reinsure at least half the business with the Indian reinsurer.

Last year, GIC paid 30-35 per cent commission on the business it took over from general insurance company though the rates differ across segments.

“Profit commission differs from case to case depending on the size of the business, the claim ratio and many other things,” said Bajaj Allianz General Insurance CEO Swaraj Krishnan. He added that as it was difficult to estimate the claim ratio for the next year, it would be tough to know how much profit commission a company would earn.

There are few companies in India which reported underwriting profits.