Home / Opinion / Insurers need better underwriting

The Union budget 2016-17 had brought in a special announcement for the general insurance industry. The listing of the public sector general insurers, which have over the years built significant value and brand equity, will be a significant milestone for the industry. Apart from monetising its investment to meet its divestment targets, finance minister Arun Jaitley also made it clear that listing public sector general insurers will bring in higher levels of transparency and accountability to the industry.

For the industry, the listing of the four public sector general insurers would be a benchmark and may set precedence for some of the other private insurers to gradually follow suit to not just fund their growth plans to ramp up insurance penetration but also for shareholders to unlock value in their investments. The insurers will now also be scrutinised for financial performance and returns to shareholders. The stock exchange listing will also force the industry to bring in underwriting discipline and ensure that companies make money from their core business rather than purely rely on generating investment profits.

The general insurance industry has grown from a topline of 12,000 crore in 2001–02 to being worth around 93,000 crore, clocking an annual growth rate of 17% with 29 general insurers in the market. However, the industry has faced some headwinds in the macro business environment given the relatively subdued industrial growth and the pricing wars following the de-tariffed regime.

After opening up of the market, the industry has seen the entry of several new private companies, which has increased competition for insurers but also choice for customers. Over the past few years, a multitude of factors have adversely impacted the industry’s profitability. After the insurance regulator introduced price de-tariffication in 2007 and provided freedom to general insurance companies to decide the premium rates in most product segments, premiums in large volume group business have seen a major decline. The market has also seen several new entrants, intensifying competition by focusing only on growth, which has led to competitive pricing pressure.

The premium rates, especially in commercial lines of business such as property, fire and group health, which drive volumes for insurers, have seen severe competition and has seen prices fall to unsustainable levels. This trend, coupled with high natural catastrophe losses and adverse claims ratio in the motor third-party liability segment, has impacted the overall profitability and solvency requirements for the general insurance companies.

During the course of the past decade, regulatory interventions have helped open up the industry, foster more competition and has largely benefited the industry. However, insurance companies need to address several areas— particularly on issues of distribution, product, pricing and solvency reform.

The road to improved profitability would require companies to reassess several key aspects of their business models, right from pricing to products, risk management, customer acquisition and distribution. It is a known fact that the Indian general insurance industry has the highest combined ratio, a key industry parameter to measure profitability, across developed and other developing economies. Combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing this by earned premium.

According to data from the General Insurance Council, the combined ratio for the industry has been consistently on the rise. It increased from 113% in 2014-15 to 119% in 2015-16. The total underwriting loss for the general insurance industry stood at around 14,400 crore in 2015-16, up a staggering 52% compared to 9,533 crore in 2014-15.

Besides, a recent report by Federation of Indian Chambers of Commerce and Industry (Ficci) highlights that returns post-detariffication have largely remained in single digits, even after adjusting for motor third-party pool losses incurred by the industry.

While the top private sector insurers have managed to maintain their combined ratios close to or less than 100%, for a majority of the companies, the combined ratios are currently much higher. Sustained underwriting losses for the general insurance industry implies that insurers are too preoccupied with the pricing game to look beyond upping their capabilities to focus on improving the customer experience and may also eventually impact the services offered.

Furthermore, continued losses in the coming future will affect the end consumers since it may result in laxity when it comes to claims management or towards investments on initiatives for better quality of products and services. This will not be the case if insurers can write sustainable business and fund their business growth and customer service innovations by generating profits.

The general insurance industry, considered the sunshine industry of the financial services segment, will see a positive overhaul with the listing, setting the stage for additional visibility, customer centricity, governance and focus on financial performance. While the fall in pricing has benefited customers, the industry also needs to step up its focus on creating new capabilities, digital innovations and in the crucial segment of claim settlements rather than competing on the basis of just pricing.

Tapan Singhel, chief executive officer and managing director, Bajaj Allianz General Insurance Co. Ltd

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