Indian General Insurance Sector a hidden gem

Standard and Poor's, in  a recent study on the Indian General Insurance sector has highlighted something that we always knew but did not appreciate enough: that India's general insurance sector is a goldmine, poised for excellent growth.

This conclusion stems from the fact that general insurance industry penetration as a percentage of GDP is amongst the lowest in India.  With a combined annual premium of Rs 40,000 crores, the Indian General Insurance sector is about 0.6% of GDP. With rising income levels, galloping growth rates in motor car ownership, increasing awareness of healthcare and healthcare related costs, greater predisposition to travel and home ownership, almost all the sectors within the general insurance industry are poised for impressive growth.

A few dark clouds loom though. The public sector insurance companies continue to bleed with significant underwriting losses ( masked by sale of family jewel investments). Third Party motor continues to be the biggest drain as far as underwriting losses go. Health insurance claims are also threatening to spiral out of control. The public insurance companies will have to get their act together as far as motor and health underwriting is concerned.

It is hoped that the government will relax the FDI norms allowing higher than 26% FDI in the insurance sector in India. This will greatly help in allowing more capital into this industry, leading to a better growth rate. It is also hoped that public policy, especially in the case of health and health insurance, will contribute towards a higher awareness for health insurance products.

At our end, we wouldn't be surprised if the non life insurance industry outperforms its more glamorous brother -Life Insurance- and becomes a 2 lakh crore industry by the turn of the next decade.

Third Party motor insurance premium set to increase by upto 65%

Your car insurance policy has two components : Own damage and third party.

Own damage , as the name implies, is when your car is insured for the damages that it might incur in an accident, or the insurance for your vehicle should it be lost etc.

Third Party: This is the crucial part of the insurance where you are protected for the damage that you or your car might cause to others. For example, if there is an accident involving your car where another car is damaged and there is a loss of life, you need to have protection to pay for the damages of the other car and also compensate for the financial loss of the other life. Not having this third party car insurance can be financially crippling.\

Third party motor insurance is compulsory by law. No individual is allowed to drive one's car without third party motor insurance. Third party motor insurance is also typically quite cheap. For example, for a private car, in most cases it is less than Rs 1000 per year. IRDA, the insurance regulator, still controls the pricing of third party motor insurance while it does not control the pricing of any other insurance risk. This is called tariff. The general insurance sector was detariffed in 2007 with the exception of motor insurance third party.

India is perhaps the only country in the world which has unlimited liability covered in third party motor insurance for unlimited periods of time. Thus an external party, in theory, can file for  a 100 cr compensation, even 20 years after an accident has happened! Third party claim amounts in recent years have been on the rise due to greater earning potential of individuals in general, and earnings being projected over a  longer life span.

General insurance companies in India have been bleeding because of the motor third party premiums being kept very low by the regulator. A third party motor pool has been created to pay for all the third party related claims and that has had a huge deficit . Insurance companies have been asked to provision for an additional 3500 crores to take care of this liability. And they might need to provision even more later. This pool has had such an impact that many insurers have needed to infuse additional capital to ensure that they maintain the solvency margins stipulated by IRDA. Motor third party has proved to be the curse of the general insurance industry in India.

However, IRDA has now announced new pricing for the motor third party insurance which has come as a welcome relief for all the general insurers. Effective 25th April, third party motor insurance rates will go up between 10% and 65% depending on the category of the vehicle.

The following are the basic features of this price increase effected by IRDA:

1. The increased rate for each class of vehicles has been decided after looking at the claims cost of that category of vehicles, claims experience and the cost inflation index determined by CBDT

2. Earlier the rates were reviewed every 4 years, but now the rates will be reviewed every year. This is a welcome move

3. IRDA has sternly warned the insurers that they should not shy away from writing third party motor insurance business and should make this available at their offices

The bigger increase has rightly been in the Commercial Vehicles segment which was the loss leader. While the insurance industry wanted almost a 80-90% increase, they have been allowed a 65% increase which is also quite substantial