Recession hits general insurance industry

The slowdown in economic activities in India has led to a sharp reduction in asset creation in the Indian industries. This along with rigorous cost cutting measures in all businesses has directly impacted the general insurance (non-life) industry in the country.
The 16-players industry together collected Rs 30,601 crore as premium underwritten in 2008-09, up only 9.10 per cent from Rs 28,051 crore in 2007-08. This was the slowest growth in gross premium underwritten in the last five years. The general insurance industry’s premium collection grew 22 per cent in 2006-07 and 12 per cent in 2007-08.

The most important reason for the drop in business was that many small and medium businesses either did not buy insurance covers, like fire insurance, or went for lower cover to save on premium expenditure. Also the sharp drop in sales of commercial vehicles, tractors and near stagnation in car sales led to a big drop in insurance premium underwritten. Interestingly, despite the slowdown, the general insurance industry attracted many new players last year. Universal Sompo, Shriram General, Bharti AXA are three new players to join the fray, taking total number of private companies to 12. In addition, there are four companies from the public sector: New India, National, United India and Oriental.

Among the private players IFFCO-Tokio did the best with 22 per cent growth in premium underwritten in 2008-09. Royal Sudaram, Bajaj Allianz are the other two players to manage a decent growth. But the largest private player ICICI-Lombard and the second biggest Reliance General almost stagnated (see table). But all private players together managed sober 12 per cent growth.

Among the government companies only United India could manage to grow14 per cent, while the other three grew only by single digit.

Cost catching up

Private companies now account for 41 per cent of the total premium underwritten by the industry - a fast growth from just about 20 per cent four years ago.  According to a report prepared by CARE Ratings, CARE is a Mumbai-based credit rating agency, in the recent past, insurance companies have aggressively expanded their scale of operation and a slowdown in the premium growth rates may imply higher levels of underwriting losses. This is mainly because of the “reduced ability to recompense the higher cost of operation”. On the other hand, a low level of insurance penetration in India also throws up opportunities in terms of untapped market potential. Penetration as measured by the premium to GDP ratio stood at 0.6 per cent for the Indian non life insurance industry as against a world average of 3.1 per cent in 2007, CARE said.

De-tariffication

One of the major milestones in the Indian general insurance industry has been the withdrawal of premium pricing restrictions post January 2007. Writes the CARE report: The de-tariffing of Indian general insurance industry has occurred in three phases, — in 1994 marine cargo, personal accident, health, aviation; in 2006 - marine hull segment and in 2007 - Fire, engineering and motor own damage (OD) segments. 

General insurance companies also made losses because abolition of tariffs has led to a virtual price war in certain lines of business like Fire and Engineering insurance. This is evident from the higher claims ratio in both, the fire and motor segment as well as the higher underwriting losses posted by both the private as well as public sector companies, pointed out CARE report.  “Following detariffing, premium rates in fire as well as motor-OD saw a considerable fall. While Fire segment has seen premium correction up to 70 per cent, motor segment has witnessed decline in rates upto 30-40 per cent. As a result, the Fire segment saw the claims ratio rising from 58 per cent for 2008-07 to 69 per cent in 2007-08,” said CARE in its report.

The outlook

Considering the high level of underwriting losses, going forward adjustment in premium rates would occur when the industry matures and consolidation takes place. The ability to price effectively will also imply an increased focus on risk management by the insurance companies.

The continual entry of new private players coupled with the intense competition sparked off by the detariffication of general insurance sector has also resulted in strengthening the bargaining power of the customer and development of customer centric insurance products.

On the whole, while short term scenario for the general insurance sector appears to be challenging the long term prospects definitely present ample opportunities for growth.

While the government’s plan to raise FDI cap in insurance companies from 26 to 49 per cent will lead to more capital flowing in, the untapped market potential holds the opportunity to grow faster.