De-tariffed insurance market may hit firms hard

The new year will be a challenging one for general insurers. In the coming year, the general insurance industry is expected to be completely freed from administered pricing — referred to as a detariffed market. Although the price controls were lifted in January 2006, the regulator had placed in caps on the discounts of 51.2%, this has been lifted effective January 1, 2008.

As the Insurance Regulatory and Development Authority lifts this, general insurance companies will have to compete in a completely new price environment. Competition is expected to be tough in the coming months since a bulk of renewals of large corporate accounts happen between January and March. And if all goes to schedule, IRDA is expected to stick to the April deadline of allowing changes in terms and conditions in the policies as well. This last step will allow insurers to customise policies and rates, combine and package different aspects of policies like combining a motor and health cover. All of which will mean greater price variations and numerous options for the customer.

However, industry experts caution that not only will there be a pressure on pricing but also pressure to supplement capital to meet solvency requirements. World over, detariffing in a market has meant rampant price cuts and losses in the industry. It is estimated that it usually takes about three years for the industry to stabilise where the companies go through an entire cycle of reduced prices, losses and then come up to stabilise prices following actual underwriting norms. Although, so far, with the caps and the continuation of the existing terms and conditions the regulator has managed to lend some semblance of order to the process. However, with both gone, industry experts say that the face of the general insurance industry in India could be quite different from what it is today. Despite the discounts, the general insurance industry has managed to grow 11.8% in April-November 2007 compared to April-November 2007.

Industry sources say that given the high solvency requirements mandated by the regulator, capital could become a major issue for general insurers in the year. The IRDA mandates that insurers maintain a reserve which will cover the value of insured liabilities of a 150%.