NO LIFE IN NON-LIFE

The government’s concern over the poor performance of four state-owned general insurance companies is understandable—the government is a major shareholder and these companies, once market leaders, are losing market share steadily. The thing is that the decline is perhaps irreversible and the government, as of now, doesn’t politically have the option of getting out before its shareholding takes more knocks.

Until recently, it didn’t even have the option for passing a plain vanilla bill like raising the FDI limit in insurance. Private sector general insurers had cornered 26.3% of the gross premium underwritten in the non-life sector before detarrification of the industry in 2006-07. They continue to poach more business away despite the widely-held belief that detarrification would allow public sector insurers to offer more competitive pricing and therefore get more custom.

The share of gross premium underwritten by public sector insurers continues to decline while that of the 10 private sector general insurance companies has shot up—to 34.9% in 2006-07 and to 39.9% in 2007-08. One telling data explains this: salary and employee benefits account for nearly four-fifths of total operating expenses of state insurers compared to between one-fifth and two-fifths for private insurers. Another example of public sector management: ratio of net incurred claims to premiums is around 85% as compared to 68% for private insurers.

Indeed, the problem with general insurance is there’s too little private enterprise. India is doing better, in terms of global norms, in life than non-life insurance. Life insurance penetration ratio (the ratio of premium paid to GDP) for India has steadily gone up from 2.53% in 2004 to 4.1%, very close to the global average. But non-life insurance penetration ratio has gone down from 0.65% to 0.60% during the same period and is just about one fifth the global average.

Clearly, the sector needs a boost from fresh participants. Passing the insurance FDI bill may be the incentive needed for getting more players. India, by the way, has had an experience of hosting a large number of non-life insurers. In 1972, prior to nationalisation, there were 107 general insurance companies. Imagine the business opportunities in an economy unrecognisably bigger and better than it was in 1972.

Source: The Financial Express