A Life Beyond LIC

Post-September 11, the prospects of perhaps no industry have changed as drastically as the non-life or general insurance business. And in India, it is even more so as the market has only recently been opened up.

To complement the existing four public sector general insurers—New India Assurance, Oriental Insurance, United Insurance and National Insurance—five private companies, namely Iffco Tokio, Tata aig, Reliance, Bajaj Allianz and Royal Sundaram Alliance, had entered the fray. They would together cover the entire spectrum of general insurance ranging from fire, engineering, marine cargo, marine hull and aviation and miscellaneous products like medical, personal accidents, householder and shopkeeper insurance. Rates were expected to fall as competition rose. But on September 30, the Tariff Advisory Committee (TAC) asked the general insurers to impose a surcharge of 10 per cent on all premia collected under the fire and engineering tariff business—half the general insurance business. This surcharge applies to not just new and renewed policies but also to existing ones on a pro-rata basis for the days left for the policy to mature.

Motor insurance, a third of the total business, is another loss-making area. The tac is looking at it for revision of rates. This follows a suggestion in late August to push non-life premia up by 12.5 per cent when the proposed Insurance (Amendment) Bill was opened in Parliament. Further hikes are possible. Aviation insurance has gone up from Rs 100 per passenger per trip on an aircraft to Rs 250. Three weeks ago, Indian Airlines increased its fares by Rs 100 to pass on some of the cost.

The global insurance industry expects September 11-related claims to be $20 billion to beyond $70 billion. This has led to contraction of capacity. Typically, insurance companies get a risk cover from re-insurance companies which, for a price, ensure payment of the claims of their policy-holders if they can't. These are a handful of very large companies like Swiss Re, Munich Re and Lloyd's. The huge losses to be incurred will now make re-insurance cover for Indian insurers very expensive, even up to five times the earlier cost, or not being made available at all. In some cases, the re-insurers are not ready to grant India a cover beyond $50 million, after which rates are prohibitive. The principal reason for this is India's proximity to the war zone.

Says K.N. Bhandary, New India Assurance cmd: "The losses incurred by the blasts have been disproportionate to premia charged worldwide, as terrorism risk was never perceived akin to war but to riots or civil commotion." In India, terrorism cover wasn't even charged separately but came free with property insurance.

Also, public sector insurers have not been charging the costs of intermediaries as the market was completely controlled by these four companies. Now as the market is thrown open, reaching out to the public will become imperative. Hence, costs have to go up to accommodate agent or broker commission which could be about 15 per cent. Rates will have to consider general inflation too. Again, insurance covers come far more easily in India than in the west. Says M.K. Jindal, assistant general manager, Oriental Insurance: "In the west, there is a severe penalty if a driver's licence is punched twice and he is not given any further cover." This can be done in India by a private company but not a public sector corporation with social welfare as one of its objectives.Says a senior manager of a public sector insurer: "Profit is the need of our business but is the objective of a private player." But as the face of the market changes, so will the rules. Industry estimates point to an eventual 17-20 per cent hike in premia.

The trick now will be in widening the market, geographically and customerwise, and generating volumes. This is something public sector insurers have hardly done due to various problems. They did not cover two big areas in general insurance substantially: medical and liability insurance. For the first, you need a well-developed network of hospitals and third party administration available only in big cities. The potential is huge but needs supporting infrastructure. Says Nitin Vete, an insurance agent: "False claims bog down the industry." And false claims are rampant, since they can be easily made by doctoring medical certificates. Directed by the government to provide service at the least cost for public good, public insurers could only hike the premium on a case-to-case basis if a person made repeated claims. Similarly, increased risk couldn't translate into higher premia due to the social welfare angle. For instance, says Jindal: "We did not hike rates after the Gujarat quake even though the region is earthquake-prone." Instead, they adopted three measures of monitoring and recording the damages, offering cover after a cooling period of 15 days as the tremors continued, and not honouring claims up to Rs 10,000 to eliminate the unscrupulous. Private companies will comfortably not enter such a market.

A fairly large number of Indians buy life insurance as it is savings-linked but when it comes to general insurance products, it's only the mandatory motor insurance or property insurance for factories—without which one can't avail of loans—that sell. The US disaster, for instance, hasn't charged Indians into buying risk cover. The Gujarat quake resulted in a business of Rs 10 crore or a lakh of policies. Says Bhandary: "Indians have great faith in God." So while tiny Mauritius has 14 insurance companies, Hong Kong 140 and the US about 2,000, India had only four general insurers.

But there is hope. The general insurance industry has been growing at a 15 per cent compounded rate for the past 30 years and it's expected to continue. As disposable incomes rise, companies hope to see greater volumes in medical and accident insurance. New India has recently introduced its first credit insurance product for businesses, a job being done by banks so far. The new product covers the risk of non-payment from creditors and comes at a globally comparable rate. Indian firms are increasingly seeing the worth of such insurance. Given the economic slowdown, such cover may be invaluable as companies try to expand business activity without worrying about payments. This segment is expected to double to Rs 200 crore in the next year.

The public sector insurers never really went out actively selling policies and educating consumers. But the new players are expected to. What marketing can do is clear from the US experience where its 270-million population accounts for 35 per cent of global business and per capita premia work out to be close to $3,000 against $400 for the rest of the world. Last year, the four general insurers sold 3.2 crore policies for Rs 11,000 crore. Even if one crore more Indians buy medical insurance this year at the current rate of about Rs 2,000 for Rs 3 lakh cover, it would mean a huge corpus.And even if 1 per cent of one billion Indians bought accident cover, it would be an extra Rs 1,000 crore in the kitty.

Post-September 11, private players have held back and are not ready to comment yet. But the funds needed for India are relatively low and foreign companies have no doubt about being able to increase the consumer base. But they'll have to tread carefully in this price-sensitive market. Sixty-five per cent of products are tariff-regulated by the government. A price war is on in non-tariff businesses. Premia are down dramatically as competitors try to get bulk business in group insurance covers. Not that the industry is new to rate wars; the Fab Four had fought tooth and nail after the marine insurance business was decontrolled. Parent gic had to step in and rein in the undercutting. It may be tough this time around, as the four have been granted functional autonomy by the government.

In such an unsettling time, consumers have to be ready to get the best price where price competition is allowed and expect very good service from all the dust competition will throw up. And believe what Bhandary says: in insurance, anything that comes cheap is mostly not worth it.