Underwriting losses of non-life insurance companies to increase

The general insurance industry in India is likely to be de-tariffed from 31st December, 2006 giving insurance companies the freedom to decide their premium rates.

Tariffing is a concept associated with the insurance industry for more than hundred years. Tariffs are laid down rules, conditions, rates etc prescribed by member companies, called tariff companies. This avoids unhealthy competition among the insurance companies. Also, there is no price war within the insurance companies, since tariff regulations put a ban on such practices.

In the absence of tariffing, companies can, charge lower premiums without calculating risk weightage. Hence, such companies can risk the danger of bankruptcy. Thus, tariffs were like a protection for the insuring public, shareholders and employees of the company.

Now, the authorities feel that the non-life insurance market has matured enough, and to grow further, it needs to remove this protection which is hampering the growth.

De-tariffing will enable companies to take their own decisions on premium rates, and to be profitable as well.

However, according to a CRISIL study of 12 public and private sector non-life insurance companies, underwriting losses will increase after de-tariffing.

This is likely to increase competition in profitable business segments such as fire and engineering, translating into lower returns in terms of premium generated from these segments, the report said.

The report also said that returns from severely loss-making segments such as motor third-party insurance are likely to improve, as industry players increase premium rates to cover future expected claims more efficiently than the current practice.

Post de-tariffing, underwriting losses will increase from the current levels as benefits from the increase in motor third-party premium are not expected to be sufficient to completely offset the impact of the reduction of premium levels in the profitable segments, the report added.