No slump in premium for fire cover

General insurers don't expect a further reduction in premium rates for fire and engineering covers when the regulator removes the cap on discounts stipulated when tariff controls were lifted in January 2007.

Fire and engineering insurance premium rates fell by 30 per cent this year over and above a similar or higher drop in rates a year earlier.

Government-owned general insurers were particularly upset at the Insurance Regulatory and Development Authority (IRDA) putting a ceiling on discounts that can be offered on the prices filed with the regulator.

But now the industry thinks the fire and engineering rates have bottomed out. Any further drop in rates would be customer specific, depending on the claims experience.

A survey of a few industry officials revealed that any further reduction in premiums would not be sustainable for companies after the IRDA provides complete pricing freedom.

They also said that as the industry was moving towards a freely-priced market, cross-subsidisation was being eliminated due to reduction in fire and engineering premiums, coupled with an premium increase in the health and marine insurance segments.

Sandeep Bakshi, chief executive officer, ICICI Lombard, said, "Premium rates in fire and engineering sectors dropped by 30 per cent during the April-June period, while health and marine premium prices have increased, or rather, have been corrected by around 20-25 per cent during the same period. Increased health and marine insurance rates are expected to compensate for the drop in fire and engineering segments. But, marginal corrections (slide) may be expected in fire and engineering sectors."

Expressing similar views, K N Bhandari, secretary general, General Insurance Council (GIC), said "I don't think there will be further reduction in premium rates in the fire and engineering segments. There may be a marginal decline of, may be 2-3 per cent. Beyond that, no further reduction is expected because they have already touched rock-bottom price levels." GIC is a self-regulatory body of the general insurance industry.

The Insurance Regulatory and Development Authority (IRDA) has allowed partial freedom to general insurance players post-January 1, 2007, and the companies could fix their prices with a maximum permissible discount of 51 per cent for individually-rated risks.

The regulator will remove the ceilings imposed under the freely-priced regime at a future date, after which general insurance companies can choose their own pricing structure, subject to IRDA approval.

M Anandan, managing director, MS Cholamandalam General Insurance Company, agreeing that there would be no further dip in prices, observed, "The ceilings on discounts up to 51 per cent imposed by IRDA in the fire and engineering segments, are really on the higher side. Though some of the customers and brokers feel prices will come down further, I do not think it is possible as enough discounting has been given."

He, however, thinks that there might be marginal corrections in cases of very good claims ratios. "Corrections might be seen in customer-specific cases. There might be a 5-6 per cent drop in prices on a selective basis but not across the entire board of products," he added.

Asked about likely impact on profitability of insurers because of fall in premiums in fire and engineering segments, GIC's Bhandari said "Profitability in fire and engineering will come down but an increase in third party administrator (TPA) premium will more than compensate for the fire and engineering premium rate reduction. There will be no overall impact on the balance sheets of general insurance companies."

Explaining that the growth rate of M S Cholamandalam was around 80 per cent during quarters ended March 2007 and June 2007 over year earlier periods, Anandan said growth or profitability of general insurers has not been hit in the detariffed regime.

However, the growth of the general insurance industry is likely to slow down, given the reduction in fire and engineering tariffs. Bhandari added, "The growth rate of the industry might slow down a bit this year. During fiscal 2007, the general insurance industry's growth rate was around 22 per cent, while in the current fiscal it might end up at around 18-20 per cent."

With premium rate drops in fire and engineering segments, the companies expect other sectors like marine and health, in addition to growth in retail volumes, to compensate for the possible reductions in fire and engineering premium income.

"With corrections happening in the premium rates of various sectors, the element of cross-subsidisation has been brought down to a greater extent. Structural adjustments are the purpose of detariffing. Each segment should pay for itself," Bhandari said.

A United India Insurance Company Ltd (UIIC) official maintained that due to reduction in fire and engineering rates, inadequately insured corporates stand to gain as they would look at increasing their insurance cover without resorting to cost-cutting techniques.

"Initially, discounts were provided in the fire and engineering segments and offered with other products, but under the completely detariffed regime, it will be the other way round. This is because fire and engineering insurance products will become less profitable. But, the overall profitability of the companies will be maintained as number of customers will increase and losses will be spread evenly across segments," the UIIC official explained.