The insurance regulator has allowed general insurers to slash tariff rates on fire and engineering business by up to 56.25% to spur competition in the sector.
The Insurance Regulatory and Development Authority (Irda) took the step earlier in the week following a request from the General Insurance Council, a forum of general insurance companies.
Fire and engineering portfolios are among the most lucrative ones, where price controls were lifted by the regulator on 1 January.
However, free pricing was allowed on the condition that companies would be allowed to change the base tariff rate only after six months.
The council’s aim in asking the regulator to allow companies to change rates after a little over two months was to remove restrictions on competition, said K.N. Bhandari, the council’s secretary general.
Fierce price-driven competition in fire and engineering business, which account for close to 25% of the Rs20,359 crore general insurance market, broke out in January. State-owned companies aggressively priced their products to regain market share that went to private companies after the advent of private insurers about six years ago.
Private companies fixed base tariff rates at levels that were higher than state-owned companies, and found themselves in a tough situation.
The outcome of Irda’s move on tariffs would lead to a convergence of base rates and make for a more level-playing field, said Bhandari.
Pavanjit Singh Dhingra, vice-president, north and international business, Prudent Insurance Brokers, said: “We’re back to quasi-tariffs.”
The phenomenon of quasi-tariffs is inevitable in initial stages of a transition to free pricing, said Samir Bali, director, global financial services, Ernst and Young.
Studies of transition to free pricing in foreign markets such as Germany and Taiwan showed prices dropped in the first 18-24 months followed by some kind of stability, he added.
The price-driven competition in fire and engineering portfolios has its limits. In the case of insurance policies covering mega risks such as aviation and infrastructure, general insurers have limited leeway to drop prices, said Bali. This is because these risks are shared with international reinsurers, who act as a brake on free fall of prices in the sectors.
While a renewed fall in fire and engineering prices may help consumers, insurance companies may not do too well. The fall in prices in profitable fire and engineering portfolios is expected to put pressure on the margins of general insurers.