impact of de-tariffication on profitability of non …. subramanian.pdf · impact of...

IMPACT OF DE-TARIFFICATION ON PROFITABILITY OF NON-LIFE INSURERS

December 08, 2011

By:

V. Subramanian

Head Underwriting,

SBI General Insurance Co. Ltd.

DE-TARIFF – NEED the products need to be priced equitably based on their individual loss potential tariff rates were higher than rates for similar risks in other parts of the world.

DE-TARIFF – ADVANTAGES / DISADVANTAGES

ADVANTAGES Competition will improve efficiency Efficiency will lead to reduction of premium and benefit It is part of the reforms towards liberalized economy.

DISADVANTAGES De-tariffication may make insurance unavailable at reasonable premium Companies may form cartels and jack up the premium Free market may lead to insolvency of companies and loss of protection for policyholders.

DE-TARIFF – INDIAN EVOLUTION

Phase I : The withdrawal of premium pricing restrictions April, 2004 – marine cargo April, 2006 – marine hull segment and September, 2007 – Fire, engineering, WC and motor own damage (OD) segments

DE-TARIFF – INDIAN EVOLUTION Phase I : The withdrawal of premium pricing

restrictions Part 1: Reduction in Tariff rate by 25% and further allowance of deviation from tariff rate Part 2: Complete de control over pricing from September, 2007

Type of Product Deviation Allowed from Revised tariff base rate

Effective Total Variation for Earst while tariff rate

Individual Rated Up to 35% 51.25%

Class Rated Up to 25% 43.75%

DE-TARIFF – INDIAN EVOLUTION

Phase II :Relaxation in terms and conditions 2009 – Some relaxation in terms and conditions of coverage of erstwhile tariff classes of business in Fire, Engineering, Motor (OD) and Industrial All Risk (IAR). For example, 1. Insurers are now permitted to file variations in deductibles

from those prescribed under erstwhile Fire, Engineering, IAR (Industrial All Risks) and Motor OD tariffs.

2. Insurers are also now permitted to file add-on covers over and above the erstwhile tariff covers in Fire, Engineering, IAR and Motor OD with appropriate additional premium

DE-TARIFF – INDIAN EVOLUTION

We will see following two Phases in coming time as evolution process goes on Phase III : Risk Based Pricing Opened up opportunities for migrating to risk based pricing. Phase IV: Complete Detariffing Choice in terms of breadth of coverage

DE-TARIFF - PRESENT SCENARIO Scope De-tariff Scenario

a. Rates Free – Complete De-tariff Resulting into blanket reduction in the insurance premiums without giving weight on risk based pricing

b. Add on Cover & Clauses

Earlier tariff driven, presently new wordings as per international market are filed by Insurance cos. and approved by IRDA

c. Policy Wording Tariff driven

DE-TARIFF - IMPACT

Soft market : Abolishment of price control in the Indian market had led to drastic reduction in the premium rates being offered by the Indian Insurance Companies. This is due to excess capacity availability or in other way low insurance demand in India. It is not sustainable to do business for Indian Insurance company at the prevailing rates. This has increased stress on the capital requirement of many insurance company.

DE-TARIFF – PROFITABTILITY STATISTICS

(Rs. In bn)

Year GDP U/w Result PBT

2006-07 271.40Rs. 32.10Rs. 59.60Rs.

2007-08 304.80Rs. 17.50Rs. 50.30Rs.

2008-09 335.60Rs. -1.20Rs. 30.60Rs.

2009-10 392.30Rs. -5.70Rs. 27.90Rs.

2010-11 482.10Rs. -31.70Rs. 8.10Rs.

Indian Insurance Industry - All Lines Combined

DE-TARIFF - PROFITABTILITY STATISTICS

Rs. 271.40 Rs. 304.80

Rs. 335.60

Rs. 392.30

Rs. 482.10

Rs. -

Rs. 100.00

Rs. 200.00

Rs. 300.00

Rs. 400.00

Rs. 500.00

Rs. 600.00

2006-07 2007-08 2008-09 2009-10 2010-11

Rs.

In B

illio

nIndustry - Gross Domestic Premium

DE-TARIFF - PROFITABTILITY STATISTICS

Rs. 32.10

Rs. 17.50

Rs. -1.20 Rs. -5.70

Rs. -31.70 Rs. -40.00

Rs. -30.00

Rs. -20.00

Rs. -10.00

Rs. -

Rs. 10.00

Rs. 20.00

Rs. 30.00

Rs. 40.00

2006-07 2007-08 2008-09 2009-10 2010-11

Rs.

In

Bil

lio

n

Industry - Underwriting Result

DE-TARIFF - PROFITABTILITY STATISTICS

Rs. 59.60

Rs. 50.30

Rs. 30.60 Rs. 27.90

Rs. 8.10 Rs. -

Rs. 10.00

Rs. 20.00

Rs. 30.00

Rs. 40.00

Rs. 50.00

Rs. 60.00

Rs. 70.00

2006-07 2007-08 2008-09 2009-10 2010-11

Rs.

In

Bil

lio

n

Industry - Profit Befor Tax

DE-TARIFF - PROFITABTILITY STATISTICS

Rs. 271.40 Rs. 304.80

Rs. 335.60

Rs. 392.30

Rs. 482.10

32.10 17.50 -1.20 -5.70 -31.70

Rs. 59.60 Rs. 50.30 Rs. 30.60 Rs. 27.90 Rs. 8.10

2006-07 2007-08 2008-09 2009-10 2010-11

Indian Insurance Industry (Rs. In bn)

GDP U/w Result PBT

DE-TARIFF - PROFITABTILITY STATISTICS

Rs. 36.38 Rs. 41.87

Rs. 48.90

0.85 0.35 -2.57

2008-09 2009-10 2010-11

Fire Class (Rs. In bn)

GDP U/w Result

DE-TARIFF REGIME – INDUSTRY SCENARIO

Rates are still soft – no sign of hardening Wider coverage are being offered keeping price intact e.g.

Coverage for Contingent Business Interruption T&D line with higher limits etc.

Favorable move by GI Industry with regard to Deductibles – Agreed to minimum deductible to be maintained across the industry

DE-TARIFF REGIME – CONCLUSION

Upward Correction in premium rates is must to enable insurance industry to sustain in long run Urgent need to move on to the Risk Based Pricing approach

Insurance Companies to improve their efficiencies to sustain their business in the current scenario