"The industry has not been able to cost-effectively service a huge market" Sandeep Bakhshi MD & CEO/ICICI Lombard

If Indians don't seem to care much about insuring their lives, they care even less about their assets. Or at least that's what the numbers reveal. Take a look: 99 per cent of the households are uninsured, and so are 80 per cent of two-wheelers in India, and only 2 per cent of the total health spends in the country come via insurance. "It's more a supply side issue rather than a demand issue. We have not been able to cost-effectively service a huge market," says Sandeep Bakhshi, MD & CEO, ICICI Lombard, one of the most aggressive private insurers in general insurance.

Cost is increasingly becoming a critical issue in general or non-life insurance. Three crucial portfolios were de-regulated earlier this year that had a fall-out on the overall portfolio of non-life companies. Earlier, pricing was fixed for fire, engineering and motor insurance at levels higher than commensurate risks. In this scenario, the insurance companies used to cross-subsidise their loss-making portfolios with those offering fat margins. But with tariff restrictions gone, a risk-based pricing, de-linked from other portfolios, was expected to emerge in the market. While that has happened in some portfolios-like in the case of health and motor-the immediate impact was expected to be an over-the-board drop in prices.

On that count, the consumers have not been disappointed. Rates for fire and engineering covers have dropped by 25 to 30 per cent. In fact, the price competition has been so intense that IRDA has had to step in to set a floor level for the drop in prices. "On a month-to-month basis, discounting has doubled since February," says Kamesh Goyal, head of Bajaj Allianz General Insurance, another aggressive insurer in the market. Industry watchers point out that the pricing pressure is so severe that in some cases discounts have touched 50-70 per cent as well, although the overall scenario is still not that bad. "The Indian market has behaved largely along expected lines and quite well post-detariffication," says Praveen Vashishta, CEO & MD, Howden India, an insurance broking firm.

He also points out that the Indian experience looks quite similar to those of other countries that freed up general insurance. For example, in countries such as Hong Kong, Japan and Ireland, the market growth suffered in the first four years of deregulation, but that was followed by a sharp recovery in the fifth year (See The Deregulation Effect). That means in the short term, things will only get worse for general insurers in the country.

Hurtful Competition

While customers may relish the price war (many of the large ones are flexing muscle to get hefty discounts), it's not in their interest in the long term-especially, if the profitability of the insurer gets affected. If the insurer is not healthy, then the very reason for taking an insurance cover gets defeated, since a financially precarious insurer may be in no position to pay claims. "The current price reductions have no rationale as there is no perceptible drop in risk associated with those policies," points out G.V. Rao, Chairman GVR Risk Management Associates. Rao, a former chairman of government-owned Oriental Insurance, believes that these cuts come from a mentality of chasing market share at any cost. "In a bad year, with any unforeseen catastrophe, things could become very, very ugly," warns Goyal of Bajaj Allianz.

Notwithstanding these concerns, Goyal expects the pricing pressures to continue for the next couple of years. The options are simple: chase growth or profitability. "We have taken a decision not to focus on topline this year but to try and defend our market share of around 7.2 per cent," says Goyal, adding pragmatically that in portfolios where the loss ratios are good, the company continues to compete on price. Otherwise it lets the business go. These pressures are evident in the latest statistics, where the monthly growth rates of premium for the companies have dropped to around 10 per cent as compared to over 20 per cent earlier. This drop is despite the fact that there has been an increase in the premium of some portfolios such as motor vehicles.

Retail Focus

"What we are selling is peace of mind and there is enough buying power for that" Ajit Narain MD & CEO/IFFCO-Tokio General Insurance

Next April, when the regulator is expected to completely free pricing and allow changes in policy wordings, the dynamics of the industry will change further. The prospect of even stiffer competition has got insurers to consider growing new lines of business. Since the squeeze on margins is particularly severe in corporate and commercial lines of business, insurance companies are now looking to tap retail customers to cushion against the pricing pressures. Ajit Narain, MD and CEO of IFFCO-Tokio General Insurance, says that nearly all companies have started looking at retail portfolios in a big way. IFFCO-Tokio's focus on retail business itself is such that it requires a 100 per cent subsidiary purely for retail marketing.

Another move is towards the hinterland or non-urban India. "Anything that is not categorised as Class A, B or C cities is interior India for us, and that is a huge opportunity for us (non-life companies)," says IFFCO-Tokio's Narain. Already, the share of fire and engineering is going down in the overall portfolio mix of insurance companies. Further widening of the portfolio mix and, therefore, risk, makes for sound business sense. Ultimately it will be back to the basics. Ultimately, "the core product that insurance companies sell is risk management," says Rao. Adds Narain: "What we are selling is peace of mind and there is enough buying power for that."

What will keep the general insurers going is the fact that there's plenty of room to grow. Vashishta says that for non-life business to contribute even 1 per cent of the GDP, it would need to grow at 30 per cent a year for several years. Down the road, several other changes may occur. Besides the inevitable industry consolidation, customers-particularly companies-will look at insurance from a risk management perspective. After all, global warming and terrorism are changing the world in unpredictable ways.