M. Ramesh

THE fact that the non-life insurance sector has been growing only at 12-13 per cent, like a high-growth stock trading at a low P/E, only signals the upsides in the offing.

In 2004-05, the non-life industry collected Rs 18,094 crore of premium, growing 12.8 per cent, compared with a 12.3 per cent growth in the previous year.

Two clear trends have emerged. The first is that the new players are growing fast and have gained a 20 per cent market share. The four established public sector units are yielding space to them. Last year, more than half of the Rs 2,058-crore incremental premium came from new players. The new players have been increasing their market share by some 5 percentage points each year.

The second is that there has been very little market development by any player, new or old. Experts like Mr G.V. Rao, former CMD of Oriental Insurance Company, have observed that growth has come almost entirely from product types that require little motivation by the insurance companies to buy. These are either personal lines such as motor, health and personal accident, where the demand arises either out of the legislation or the customer's needs, or fire, engineering and marine areas where the demand is led by financial institutions. More than 90 per cent of the incremental premium has come from these segments. It has been observed that insurance companies have not tried to push customers to buy insurance for their "unarticulated needs."

Again, within these traditional areas, evidence shows that the new companies have been able to choose profitable sub-segments/customers, while the public sector units have become preoccupied with how to offset the underwriting of losses by increasing investment income.

These two trends establish what most people know instinctively — the new private sector companies have been very agile and picky, but their growth has not been innovation-led. This hardly meets the objective of opening up of the sector, which was to grow the market in terms of both products and geography. However, the winds of change have begun to blow. First of all, unlike the previous years, economic growth has been coupled with a greater awareness of risks — thanks to a series of high-profile disasters. Historically, it has been seen that the insurance sector grows 2.5-3 times as much as the gross domestic product (GDP) does. As India's GDP growth is about 8 per cent, the insurance sector should have grown at least 20 per cent, instead of the 13 per cent recorded last year. Obviously, growth has been lower than what it ought to have been because of the low awareness of risks. But in recent times, disasters such as the tsunami, Mumbai floods and oilrig fires have raised awareness of risks. At a time when investments are under pressure because of rising yields, such disasters will also make insurers take a fresh look at underwriting profits. The cross-subsidisation of leaky portfolios such as motor and health by a profitable one like fire will cease and better pricing will take the stage in areas such as the marine segment.

The industry would mature further if de-tariffing is introduced. Total de-tariffing has not yet happened because both the industry and the regulator want to play it safe, though for different reasons. The industry wants to assess its staying power in a free market, which is why one often hears statements such as `De-tariffing is great, but now is not the time for it.' The regulator appears to be wary of de-tariffing, because of fears of a drastic drop in premium rates, as it happened when marine cargo and marine hulls were freed. But liberalisation is inevitable and disasters seen this year would only accelerate the process. When de-tariffing happens, there would certainly be a shake-up in the market, but that shake-up would halt the rate-drop race. At such a time, players would focus on bringing in innovative products to address the `unarticulated needs' of customers.

Yet another positive trend seen is the rural focus, which is due to the rising rural incomes and competition. The potential has never been questioned. Take `health,' for example. A study by the PHD Chamber of Commerce and Industry stated that health insurance could reach Rs 25,000 crore by 2010 against Rs 1,600 crore now.

The international market for reinsurance is very competitive and Indian insurance companies are able to get good rates, although there is a perception that reinsurance rates are set to harden.

The huge capacity of General Insurance Corporation is as yet under-utilised. Given that GIC gets about Rs 4,000 crore of premium income, it has a capacity to accept reinsurance of up to about Rs 10,000 crore. The problem is perhaps the effect of the not-so-high sovereign rating of India.

There is scope for another Indian reinsurer also. There is a view that the Insurance Regulatory and Development Authority should mandate a portion of the Indian business to another reinsurer just as it mandates a 20 per cent placement with GIC.

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