impact of de-tariffication on profitability of non-life insurers

IMPACT OF DE-TARIFFICATION ONPROFITABILITY OF NON-LIFE INSURERSDecember 08, 2011By:V. SubramanianHead Un<strong>de</strong>rwriting,SBI General Insurance Co. Ltd.

DE-TARIFF – NEED‣ the products need to be priced equitably basedon their individual loss potential‣ tariff rates were higher than rates for similarrisks in other parts <strong>of</strong> the world.

DE-TARIFF – ADVANTAGES / DISADVANTAGESADVANTAGES‣ Competition will improve efficiency‣ Efficiency will lead to reduction <strong>of</strong> premium and benefit‣ It is part <strong>of</strong> the reforms towards liberalized economy.DISADVANTAGES‣ De-<strong>tariffication</strong> may make insurance unavailable atreasonable premium‣Companies may form cartels and jack up the premium‣Free market may lead to insolvency <strong>of</strong> companies andloss <strong>of</strong> protection for policyhol<strong>de</strong>rs.

DE-TARIFF – INDIAN EVOLUTIONPhase I : The withdrawal <strong>of</strong> premium pricingrestrictionsApril, 2004 – marine cargoApril, 2006 – marine hull segment andSeptember, 2007 – Fire, engineering, WC and motor owndamage (OD) segments

DE-TARIFF – INDIAN EVOLUTIONPhase I : The withdrawal <strong>of</strong> premium pricingrestrictionsPart 1: Reduction in Tariff rate by 25% and further allowance<strong>of</strong> <strong>de</strong>viation from tariff rateType <strong>of</strong> ProductDeviation Allowedfrom Revised tariffbase rateEffective TotalVariation for Earstwhile tariff rateIndividual Rated Up to 35% 51.25%Class Rated Up to 25% 43.75%Part 2: Complete <strong>de</strong> control over pricing from September,2007

DE-TARIFF – INDIAN EVOLUTIONPhase II :Relaxation in terms and conditions2009 – Some relaxation in terms and conditions <strong>of</strong> coverage<strong>of</strong> erstwhile tariff classes <strong>of</strong> business in Fire, Engineering,Motor (OD) and Industrial All Risk (IAR).For example,1. Insurers are now permitted to file variations in <strong>de</strong>ductiblesfrom those prescribed un<strong>de</strong>r erstwhile Fire, Engineering, IAR(Industrial All Risks) and Motor OD tariffs.2. Insurers are also now permitted to file add-on covers overand above the erstwhile tariff covers in Fire, Engineering, IARand Motor OD with appropriate additional premium

DE-TARIFF – INDIAN EVOLUTIONWe will see following two Phases in coming timeas evolution process goes onPhase III : Risk Based PricingOpened up opportunities for migrating to riskbased pricing.Phase IV: Complete DetariffingChoice in terms <strong>of</strong> breadth <strong>of</strong> coverage

DE-TARIFF - PRESENT SCENARIOScopeDe-tariff Scenarioa. Rates Free – Complete De-tariffResulting into blanket reduction inthe insurance premiums withoutgiving weight on risk based pricingb. Add on Cover &Clausesc. Policy Wording Tariff drivenEarlier tariff driven, presently newwordings as per internationalmarket are filed by Insurance cos.and approved by IRDA

DE-TARIFF - IMPACTS<strong>of</strong>t market : Abolishment <strong>of</strong> price control in theIndian market had led to drastic reduction in thepremium rates being <strong>of</strong>fered by the IndianInsurance Companies. This is due to excess capacityavailability or in other way low insurance <strong>de</strong>mand inIndia.It is not sustainable to do business for IndianInsurance company at the prevailing rates. This hasincreased stress on the capital requirement <strong>of</strong>many insurance company.

DE-TARIFF – PROFITABTILITY STATISTICSIndian Insurance Industry - All Lines Combined(Rs. In bn)Year GDP U/w Result PBT2006-07 Rs. 271.40 Rs. 32.10 Rs. 59.602007-08 Rs. 304.80 Rs. 17.50 Rs. 50.302008-09 Rs. 335.60 Rs. -1.20 Rs. 30.602009-10 Rs. 392.30 Rs. -5.70 Rs. 27.902010-11 Rs. 482.10 Rs. -31.70 Rs. 8.10

Rs. In BillionDE-TARIFF - PROFITABTILITY STATISTICSRs. 600.00Industry - Gross Domestic PremiumRs. 500.00Rs. 482.10Rs. 400.00Rs. 300.00Rs. 271.40Rs. 304.80Rs. 335.60Rs. 392.30Rs. 200.00Rs. 100.00Rs. -2006-07 2007-08 2008-09 2009-10 2010-11

Rs. In BillionDE-TARIFF - PROFITABTILITY STATISTICSRs. 40.00Industry - Un<strong>de</strong>rwriting ResultRs. 30.00Rs. 20.00Rs. 10.00Rs. 32.10Rs. 17.50Rs. -Rs. -10.00Rs. -20.00Rs. -1.20Rs. -5.70Rs. -30.00Rs. -40.00Rs. -31.702006-07 2007-08 2008-09 2009-10 2010-11

Rs. In BillionDE-TARIFF - PROFITABTILITY STATISTICSRs. 70.00Industry - Pr<strong>of</strong>it Befor TaxRs. 60.00Rs. 50.00Rs. 40.00Rs. 59.60Rs. 50.30Rs. 30.00Rs. 20.00Rs. 30.60Rs. 27.90Rs. 10.00Rs. -Rs. 8.102006-07 2007-08 2008-09 2009-10 2010-11

DE-TARIFF - PROFITABTILITY STATISTICSIndian Insurance Industry (Rs. In bn)GDP U/w Result PBTRs. 482.10Rs. 271.40Rs. 304.80Rs. 335.60Rs. 392.30Rs. 59.60 Rs. 50.3032.10 17.50Rs. 30.60 Rs. 27.90-1.20 -5.70Rs. 8.10-31.702006-07 2007-08 2008-09 2009-10 2010-11

DE-TARIFF - PROFITABTILITY STATISTICSFire Class (Rs. In bn)GDPU/w ResultRs. 36.38Rs. 41.87Rs. 48.900.85 0.35-2.572008-09 2009-10 2010-11

DE-TARIFF REGIME – INDUSTRY SCENARIO‣ Rates are still s<strong>of</strong>t – no sign <strong>of</strong> har<strong>de</strong>ning‣ Wi<strong>de</strong>r coverage are being <strong>of</strong>fered keeping priceintact e.g.Coverage for Contingent Business Interruption T&D line with higher limits etc.‣Favorable move by GI Industry with regard toDeductibles – Agreed to minimum <strong>de</strong>ductible to bemaintained across the industry

DE-TARIFF REGIME – CONCLUSION‣ Upward Correction in premium rates is must toenable insurance industry to sustain in long run‣ Urgent need to move on to the Risk Based Pricingapproach‣ Insurance Companies to improve their efficienciesto sustain their business in the current scenario