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Auto Insurance New
Monday 31 December 2007
ROI on Sensex gains offsets underwriting and detariffing losses for general insurers
Monday 31 December 2007
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The
detariffing of the insurance sector meant that, in 2007, general insurance
companies had to deal with two major adjustments - reducing premium amounts to
offset competition and underwriting losses. In spite of this, they more than
made up their losses by return-on-investment (ROI) incomes due to the booming
stock market. Risks were spread thinner, anchored by a Sensex that did not know
when to stop until it shot above the 20,000-mark.
The flip side to this scenario occurs when the Sensex does not generate as much
returns as budgeted for by the insurers. For instance, if there is a correction
in the equity market, companies over-reliant on capital gains (more than 25% of
profit before tax) will have to increase premium prices to maintain
profitability. An instant response to the correction is not feasible. Such a
move would affect premium rate stability, which cannot be linked to swings in
the equity market. The
back-story began in January 2007 when the Insurance Regulatory & Development Authority (IRDA) gave general insurers the freedom
to price policies within prescribed limits. Premiums dived to 60% of the
original levels with companies rushing in to sell the cheapest policies and expand
the market share. The insurance
industry will usher in complete free pricing in January 2008. |
