New Delhi: Intense competition and huge falls in premium rates for fire and engineering insurance after India removed price controls in these segments two years ago could spell trouble for insurers, industry insiders said.
“Prices are (at an) all-time low. This reflects the indiscipline of the market...and these are not sustainable rates,” said Pavanjit Singh Dhingra, vice-president of Prudent Insurance Brokers Pvt. Ltd. Last year, the premium rates for fire and engineering policies were 3-3.5% of the sum assured, Dhingra said.
The country’s Tariff Advisory Committee (TAC) stopped setting premium rates for engineering and fire insurance policies in 2007. Engineering insurance is an industry term to describe various types of policies for the protection of construction work, as well as the erection and operation of machinery.
Premium rates for fire and engineering cover, which are usually initiated and renewed at the end of a fiscal year, have fallen to as low as 90-95% on an average in the year to 31 March, compared with the rates set by TAC in 2007, brokers and company officials said. In the preceding fiscal year, premium rates fell by around 70%, compared with the 2007 controlled rates.
“The rates have come down by 85-88% on an average. Many times they (insurers) give discounts to the extent of 90-95%, which are unthinkable. This can lead to companies making losses,” said Rahul Aggarwal, head of Optima Insurance Brokers Pvt. Ltd.
“Due to high competition, discounting is high at around 90% for big-ticket (fire and engineering) policies,” said S.K. Sethi, chief executive officer at Ria Insurance Brokers Pvt. Ltd, a New Delhi-based insurance brokerage.
Non-life insurers have taken advantage of a low claims ratio—claims payable as a percentage of premium income—in these two segments to offer big discounts on premiums.
Sethi said that even though the claims ratio in fire and engineering insurance is low at around 5-10%, “the sharp decline in premium rates can turn the segment unprofitable with (a major) chunk of premiums going to meet intermediary and processing costs, leaving little for insurance companies”.
The share of the fire and engineering segments in the general insurance category has fallen from 18% to 10% in the past four years, Sethi said.
“Tough competition has slashed the rates up to 90% (from 2007 rates). In the greed to get new premiums, companies are given discounts which can have adverse effect,” said an executive at Shriram General Insurance Co. Ltd, who didn’t want to be identified because he is not authorized to speak to the media.
Private sector non-life insurers reported a decline of 41% to Rs160 crore in their underwriting profit from the fire business in 2007-08, compared with an underwriting profit of Rs286.63 crore in 2006-07, data released by the Insurance Regulatory and Development Authority (Irda) show.
Overall, they had reported an underwriting loss of around Rs94.36 crore in 2007-08, compared with an underwriting profit of Rs161 crore in 2006-07.
An insurer incurs loss in its underwriting operations when the claims it pays exceed its premium income.
During the same period, the underwriting profit of four public sector non-life insurers fell by 53% to Rs655 crore, compared with Rs1,396 crore a year earlier. The four public sector non-life insurers are National Insurance Co. Ltd, United India Insurance Co. Ltd, New India Assurance Co. Ltd and Oriental Insurance Co. Ltd.
Private general insurers reported a profit of Rs44.46 crore from their investments, compared with Rs227.89 crore in 2006-07.
Sethi said that the mad rush for new business and unprofitable underwriting could lead to mergers and acquisitions in the general insurance space, with bigger companies buying out smaller firms.