Cut and thrust

In 2002, when India’s telecom regulator said incoming calls on mobile telephony networks would be free, the move was seen as the death knell for an industry then reeling under losses. Seven years later, the Indian telecom market is the word’s fastest-growing, with tariffs that are among the lowest and operators making a profit.

Two years ago, when the Insurance Regulatory & Development Authority of India (IRDA) freed (or de-tariffed) premiums in the general insurance sector, some players were apprehensive that it would lead to cut-throat pricing pressure. Their fears came true.

Since the freeing of premiums, motor/car premiums have fallen by 20-30 per cent and fire insurance by up to 70 per cent, making for an average reduction of 40 per cent. Life insurers were not hot about slashing premiums: they preferred to base rates on their experience and the mortality rate tables.

But while customers across sectors are happy, general insurance players are glum, as profitability has been hit badly. “Post de-tariffing, discounts in motor insurance are much more than what the general insurance players can sustain,” says K.A. Somasekharan, CEO, Reliance General Insurance. And the general economic slowdown couldn’t have come at a worse time. “The slowdown also led to lower amount of insurance underwritten,” says Anuj Gulati, Director of ICICI Lombard.

The general insurance industry also seems to have realised that too much undercutting is not in its interest. The industry grew by nine per cent in 2008-09 in terms of premium underwritten, the slowest in the last five years, dragged down by the premium cuts and the general slowdown.

Gulati of ICICI Lombard expects insurance premium to move up. “Prices will correct (go up) as the current levels of premium are unsustainable,” he says, when the economy looks up, and when the players again start aiming for profitability.

He expects the general insurance companies to offer value added services and focus on risk based pricing. “Customers would have a wider choice with better risk covers and would also need to maintain a quality profile for positive risk rating,” adds Gulati.

Some value-added services: lower premium for cars driven by “experienced” drivers as opposed to new hands. Similarly, insurance companies could offer customers a spare car when the insured vehicle breaks down.

While the general insurance industry is expecting to provide such services, the life insurance companies are already doing so, with some charging premium based on the health risk of an individual. Birla Sun Life Insurance has a policy “High Net Worth Term Plan” where a smoker is charged a higher premium than a non-smoker. Similarly, the premium for females is lower than that for males.

Other insurance companies, too, have reduced the premium on term plans, by around 15-20 per cent. “This (reduced premium for term plans) is mainly due to increase in life expectancy of people, which also reflects in better mortality experience for the insurers, improved operational efficiency and reduction in solvency requirements,” says Mayank Bathwal, CFO, Birla Sun Life Insurance.

Despite such product innovation and lower rates, term policies are still not very popular, as most Indians continue to see an insurance policy as a savings instrument. (Unlike the endowment policies, buyers of term policies do not get their premium/ money back on maturity.)

However, some players say those who have reduced premium have done so for select target groups and not across the board. “Reduction in premium has happened in case of few companies and within this it is restricted to a group of people,” says Malay Ghosh, President, Reliance Life Insurance. He says the reduction in premium has happened mainly in term policies, which in any case do not have too many buyers.

According to Ghosh, even distributors do not find term policies attractive since the commission is low. K.S. Gopalakrishnan, Chief Financial Officer, AEGON Religare Life Insurance Company, says there is a possibility of further reduction in the premium for term policies and this can happen with further segmentation of customers and shift in consumer behavior.

But whatever be the future of the insurance industry, the Indian consumers are happy as they pay lower rates for their insurance policies. Moreover, there are big hopes within the industry players, like mobile operators, as insurance in India is still untapped to large extent.