Detariffing to fuel losses: Crisil

Non-life insurers' core business will remain unprofitable.

Detariffing of the general insurance industry from January 2007 will increase underwriting losses of general insurers from the current levels.

The underwriting losses will rise as benefits from the increase in motor third-party premium income are not expected to be sufficient to completely offset the impact of reduction of premium levels in the profitable segments such as fire and engineering.

The core business operations of non-life insurers will remain unprofitable over the medium term, according to a study by rating agency CRISIL.

If, however, insurance companies can significantly raise motor premium levels, the extent of underwriting losses can actually come down from the current scenario.

Crisil said its analysis reveals that a 10 per cent reduction in fire, engineering, and motor own damage premium, accompanied by a 100 per cent increase in motor third-party premium, will reduce the industry's underwriting losses from Rs 1,771 crore to Rs 574 crore in a few years.

Crisil feels this scenario is not very likely given the sensitive nature of motor third party premium and its widespread impact which would restrict the level of premium increase in this segment.

In sum, whatever scenario unfolds in a detariffed regime, the core business operations of general insurance companies will remain unprofitable.

However, over the long term, margins in the fire and engineering segments are likely to stabilise and move up as industry matures, supporting overall profitability levels.

The financial profiles of domestic public sector non-life insurance companies are not likely to be affected. This is owing to their continued strong capitalisation levels including large reserves from un-booked profits on investments.

Technical reserves are significantly high for the four largest players in the sector, all of which are government-owned. Of these, National Insurance Company, New India Assurance, and Oriental Insurance, have financial strength ratings of 'AAA/Stable' from Crisil. Over 70 per cent of net premium in the domestic general insurance industry is generated under tariffed lines of business.

With effect from December 31, fire, engineering, motor and workmen's compensation are to be detariffed.

Detariffing is likely to increase competition in profitable business segments such as fire and engineering translating into lower returns in terms of premium generated from these segments.

In contrast, returns from severely loss-making segments such as motor third-party insurance are likely to improve as industry players increase premium rates to cover future expected claims more efficiently than the current practice.