Underwriting profit of general insurers: Miles to go

In the business of general insurance there are three outgos - claims, commissions and management expenses. Pricing -

 

that is, the premium to be charged - is intricately dependent on these three outgos, besides the risk profile per se. I strongly believe that if the pricing is not right, then the biggest sufferer is claims and related-customer services. By its very nature, general insurance is an yearly business with yearly contracts, unlike long-term covers in some cases. The pressure on us is to perform on a real-time basis, where there is nothing to be left for the future. That is why it is often said that in general insurance you have to keep earning every day to survive another day. Any recklessness in the market in terms of pricing gets reflected immediately in the balance sheet.

Knowing this well, as an industry, we all failed to match pricing with these outgos when free pricing came into existence. Somehow, our entire learning on the basics of doing the insurance business went for a toss and was conveniently forgotten. The results are in front of us - the combined ratio of the industry started shooting up coupled with third party pool losses, and the underwriting loss of the industry is worsening year after year. Underwriting profit (i.e., profits from core operations) does not seem to be a concern for the industry.

But have these brought in some bearing in the industry? The answer is yes and no. Yes, because now we hear a lot of noise being made in the industry from the perspective of being profitable. But whether you should look at underwriting profit or investment income to boost profitability is a big question worth pondering for all of us. India is quite lucky, as investment returns are still good. But worldwide, and in specific markets, it has been seen that investment returns have disappeared very fast. And companies which do not have strict underwriting guidelines or norms have suddenly started making huge losses.

Underwriting profitability is not only something which will decide the future of the industry but, as I said earlier, we are in a business in which daily action gives you an immediate feedback from the market in terms of your profitability and customer service. Hence, I believe that it has to be a top priority for all of us. I also said yes when I looked at other companies business line-wise. Somewhere the concept of underwriting profitability creeps into their business model and gets reflected in their balance sheet. I am happy, as it looks like a good start, but to state that all companies will look at underwriting profit or start making underwriting profit in the next couple of years, will be too early, as I do not think it will happen immediately. But some definitely will. Those companies which will, I am sure, will be the ones that will survive for a long time and be able to provide better services to their customers.

Tapan Singhel

Managing Director & Chief Executive Officer, Bajaj Allianz General Insurance