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Detariffing has triggered a new wave of price wars

Indian Express, 01 May, 2007

A liberal market with tightly controlled prices that was the perception of the general insurance industry in the country, until December last year. Then came detariffing. It was expected to give much-needed help to the industry, provide pricing flexibility and offer respite to public-sector insurance companies, which have been reeling under heavy losses, particularly in areas like motor insurance.

Four months on, however, private players are feeling the heat. Insurers say detariffing has triggered a new wave of price wars, with both public and private insurers vying to give the highest discounts on insurance premiums. It was expected that detariffing would give insurers the freedom to give discounts on products, based on their risk-assessment of different categories of people. Contrary to that, however, companies are indiscriminately offering maximum discounts, says T A Ramlingam, head of underwriting at Bajaj Allianz General Insurance.

 This, he feels, may lead to an overall loss of profitability in the industry.

 Currently, the general insurance business is divided among three major categories. At 50 per cent, the motor segment commands the highest market share, with fire cover at 30 per cent and engineering, and health and marine at 20 per cent. Of this, the biggest loss maker has been the motor sector. "The fire and engineering space has typically been quite profitable for insurers, with margins of 15-25 per cent. However, with insurers now offering discounts between 40-50 per cent in the segment, it won''''t be too long before it goes the motor way," says a Manager of corporate marketing at Prudent Insurance Brokers, Darvesh Panchal.

 A similar concern dogs the case of the commercial vehicles own damage (OD) segment of business, as it is believed to be profitable. It is expected that when private companies start targeting the OD business of commercial vehicles, the resultant competition would lead to a slash in rates. This, in turn, would negatively impact bottom lines in the segment.

 Private insurers say the rate cuts are a result of competitive pressure in the industry. "There are 27 players in the industry and most of them are offering maximum discount- that is, 51.25 per cent to gain market share. Since public sector firms are able to offer the lowest rates, private sector insurers are compelled to follow," says Ramlingam.

Yogesh Lohia, general manager at Oriental Insurance Company agrees "We have the financial strength to offer higher discounts, but it may not be viable for private companies to offer the kind of prices that we do. In the same vein, private companies cannot afford to lose market share, even if it eats into their profits."

 Not all private players are complaining, however. While Antony Jacob, MD, Royal Sundaram Alliance concedes that margins in some portfolios have been eroded due to competitive prices and undercutting of rates, he continues to maintain a buoyant outlook for the industry, post-detariffing -

"As and when the industry is permitted to develop products and align prices to customer requirements and risk profile, the boom being experienced by this sector will multiply manifold as will customer satisfaction."

Others feel that detariffing will be a potent tool to align prices and promote innovation in insurance products. Says Kartik Jain, head of marketing at ICICI Lombard General Insurance - "Earlier, many companies preferred to stay away from the commercial vehicles third party (TP) segment as it was loss making. But now, rates have been hiked by 70 per cent in the segment.


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