Get ready to shell out more for motor, health & fire insurance

You may soon have to shell out more to buy motor, health or fire insurance. Concerned over the high level of losses in general insurance and pressured by a government direction to move further towards market-linked pricing, insurers are planning to raise premiums by an initial 2-5% and further up gradually, sources said. Some of the hike will be inflation-linked, but a major portion will be due to the new pricing strategies adopted by insurers after assessing risks.

In recent meetings with insurance industry representatives, the finance ministry cited mounting losses, asking state-run insurers (including Oriental Insurance, United India Insurance, New India Assurance and National Insurance who together command 58% of the R53,000 crore non-life business) to consider revamping premiums, sources told FE. The ministry said instead of cutting prices to beat competition, premiums should take into account the companies’ expenses, ability to pay claims, risk assessment and incurred losses.

“The market should harden soon. Initially, one can expect a 2-5% hike across classes. Prices will depend on each company’s losses,” said an official from leading PSU non-life insurer. The official said companies are reviewing their premium prices by analysing their losses, cash flow, management expenses, risk assessment and costs of acquiring business.

A top official of a private sector insurer explained that insurers are increasingly considering acquiring only clients adopting best practices — such as plants with proper protection against break out of fire. Insurers in the motor segment are also doing a region-wise study across India on incidents of accidents and vehicle thefts to better price their premiums.

The General Insurance Council, the representative body of the non-life insurance sector, is also seized of the matter. “Premium prices will go up shortly. Companies have understood that prices can’t go down any further due to the mounting losses. Definitely there is a concern and every company is tightening its operations to reduce losses,” a council official said requesting not to be named. The official said the timing of the price hike and the percentage of increase depends on each company.

Anuj Gulati, managing director & CEO, Religare Health Insurance said: “Specialist companies are investing in better claims management and better technologies and hence they are able to offer sustainable prices to customers.”

Rising claims are a major reason behind losses. Motor and fire insurance had higher claims ratio at 94.9% and 96.77% respectively. Motor is the largest segment in non-life insurance commanding 45.84%. The ministry’s direction comes even as an earlier ministry diktat — PSUs should not compete on premiums and must share data on claims and premiums — had created a furore with private players crying foul over such ‘cartelisation’.

After the dawn of detariffing regime six years ago that largely did away with benchmarking premiums and gave insurers pricing freedom, insurers have been pricing their policies with the sole aim to gain maximum market share even at the cost of their bottom lines, sources said. This has led to reduction in tariff rates, but a simultaneous increase in claims have led to losses in the sector. Sources said the finance ministry also cited reports of genuine claims being rejected by public sector insurers to reduce losses, thereby cutting corners and damaging the prospects of the sector.

“We have told them not to adopt the self-destructive practice of price cutting. Let the natural economic process of price discovery take over and it will automatically lead to better financial health. Companies should keep in mind the welfare of customers and not just their market share,” an official said. The ministry has, however, dismissed charges of cartelisation in the sector. Regulatory data show that underwriting losses of non-life insurance companies in 2011-12 was still high at R8,817 crore, though it was down by 11.33% from R9,944 crore in the previous fiscal.

Of this, the losses incurred by the public sector insurers fell by 22.94% to R5,817 crore in 2011-12 from R7,549 crore in 2010-11, while the losses of the private sector insurers rose 25.27% to R2,999 crore in 2011-12 from R2,394 crore in 2010-11 as a result of the “increase in the reserve for unexpired risks”.

The incurred claims ratio (or ICR — net incurred claims to net premium) of the non-life insurance industry declined to 88.85% in 2011-12 from 93.3% in the previous fiscal. The ICR for public sector insurers fell to 89.22% in 2011-12 from 97.03% in the previous year, while the private sector insurers’ ICR marginally rose to 88.22% in 2011-12 from 86.71% in the previous year.

The Irda data show that operating expenses of non-life insurers had risen 5.25% to R11,178 crore in 2011-12 over the previous year. While the operating expenses of the PSU insurers slipped only marginally by 1.87% in 2011-12 to R6,563 crore, that of the private sector rose 17.35% to R4,614 crore.

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