A subsidised cover

For Nestle, the Swiss foods multinational it was a great bargain. A few months ago Nestle struck a deal with a private sector insurance company to renew its marine insurance -- for a mere Re 1.

How did it get such a fantastic deal? Quite simply because the Rs 2,000-crore (Rs 20 billion) Nestle also insured its plants and premises against fire and other risks worth over Rs 1 crore (Rs 10 million), all from the same leading private sector insurance company.

Last year, National Insurance Company had only a five per cent share of Reliance Industries' Rs 40,000-crore (Rs 400 billion) insurance cover. This year it has zoomed to 30 per cent. How was this spectacular coup pulled off? For a larger share of a more profitable business, National Insurance agreed to underwrite the risk cover of Reliance Infocomm's cellular phones.

Competition is changing the face of the Indian insurance industry. With competitive pressures in the estimated Rs 15,673-crore (Rs 156.73 billion) non-life insurance industry, as many as 12 players are vying for the same corporate pie.

No wonder then, freebies and huge discounts, once the sole purview of the fast moving consumer goods industry, are being adopted by insurance players as well. So much so, that to bag corporate accounts, many insurance companies are subsidising some covers so heavily that they are practically free.

In fact, like in banking, cross-subsidisation is also the new buzzword in the insurance sector. Insurance players are subsidising non-tariff, unprofitable businesses by writing profitable fixed-priced (tariff) portfolios of the same company. Today, regulations permit cross subsidisation.

In the case of non-tariff plans, where insurance companies can levy prices at will, many are quoting just a token Re 1 premium but the ultimate aim is to bag the company's profitable tariff portfolio.

"Cross subsidisation is a fall out of the market inefficiencies, as a result of the Indian insurance sector continuing to operate in a tariff environment," says HDFC Chubb General Insurance's chief executive officer, Shrirang V Samant.

But why is everyone chasing corporate business? Today, corporate business accounts for one-third of the non-life insurance business. So apart from the size and potential of the business, the cost of acquisition of a corporate client is much less than that of individual clients, say players.

The logic is simple: Give us a chunk of your profitable business and we will underwrite a host of other risk covers. And making the most of it are the companies. They are ready to buy a fire policy. But in return, they also want the insurance player to underwrite their marine, group health and personal accident policies.

Corporates claim that they are not demanding their pound of flesh. They say that with many of them displaying an excellent record for making no claims on their insurance policies, cross-subsidisation is a reward for being a risk-free client. Insurance companies evaluate a risk as being a good risk if the claims on a policy amount to less than 60 per cent of the premium paid.

For instance, multinationals like Nestle and Cadbury are considered good risks. "Tariffs do not distinguish each risk and hence insurance companies are unable to reward a good client by offering a discount on the premium cost. On the other hand, they load the premium for bad clients," reveals a manager in a multinational company.

So is it a win-win situation for India Inc? Sure it is, a fact that insurance players are unhappy about because not everyone wants to cross-subsidise. Some even refer to cross-subsidisation as a gimmick.

"The premium levied on non-tariff policies do not take into account the actual risk or the possibility of claims, thereby making these portfolios all the more unprofitable," says a player.

HDFC Chubb's Samant claims that his company has lost a lot of business. "Since April, we have been unable to do business because we are unwilling to cross-subsidise," he says.

It is the same with Tata AIG General and New India Assurance. Both companies claim they would rather lose out on corporate accounts than cross-subsidise.

"Retention of major corporate accounts has been a major headache for public sector insurance players," says G V Rao, former chairman and managing director of Oriental Insurance Company.

Against private insurance companies' average growth rates of about 85 per cent in fiscal 2004, the public sector has grown by just six per cent.

In the last one year, New India Assurance has seen its share in Reliance Industries' risk cover shrink from 65 per cent to 45 per cent when it refrained from offering freebies. It saw a drop of 5.7 per cent in premium accretion in February 2004 against the corresponding month last year.

By comparison, National Insurance which cross-subsidises, recorded a rise in premium income of Rs 2,489.3 crore (Rs 24.89 billion) in February 2004 against Rs 2,160.3 crore (Rs 21.6 billion) in February last year.

ICICI Lombard recorded the highest accretion in premium income in February 2004 by Rs 36 crore (Rs 360 million) over the previous year. Bajaj Allianz saw a growth rate of 70 per cent with premium income rising from Rs 241 crore (Rs 2.41 billion) in February 2003 to Rs 412.49 crore (Rs 4.12 billion) in February 2004.

Analysing the public sector performance up to February 2004, the IRDA Journal states that National Insurance alone has contributed Rs 500 crore (19.3 per cent increase) to the overall accretion of Rs 675 crore (Rs 6.75 billion) of the public sector players.

National Insurance was unable to get reinsurance protection from the General Insurance Corporation of India for Reliance Infocomm's risk.

It not only covered the company's handsets but also any default in payment of monthly bills. The National Reinsurer -- GIC -- refused to grant the reinsurance cover since the low premium quoted -- under Rs 100 -- was not acceptable to the level of risk undertaken.

"This explains why there has not been much appreciable growth in non-tariff business as a result of intense competition," says New India Assurance's chairman & managing director R Beri.

For instance, industry sources state that this year has seen rates on non-tariff covers like marine, group health and liability policies fall drastically by well over 12 to 25 per cent.

This does not worry many private players. "We look at the client profitability as an entire package. Wherever regulations permit and based on the profitability of the customer, we offer better rates even if it means undercutting competition," reveals a senior executive of a leading private sector general insurance company.

He points out that his counterparts in the public sector also offer quotes on marine covers at Re 1. Group health is another unprofitable portfolio, which is often thrown in as a freebie just to bag the profitable corporate account.

Even so, players want the Insurance Regulatory Development Authority to take up the matter. "Corporate strategies to deal with unhealthy competitive market pressures have yet to be devised and implemented," writes Rao in the latest IRDA Journal.

This rate war for the profitable corporate business is only a precursor to what will happen when the insurance sector is detariffed over the next two years. That is when the Tariff Advisory Committee will no longer put any cap on the premium rates, thereby letting market forces take shape.

Corporate buyers feel that under the tariff regime, risk covers like fire are over-priced. They say that it is only fair that insurance companies accommodate corporate entities and offer discounted pricing on non-tariff polices.

The day fire and motor insurance is detariffed -- that is the cost of the cover will actually depend upon the actual risk -- the market will become more sensible, feel the players.

As a senior state-owned general insurance company manger says: "Cross-subsidisation will then come to an end." Today as insurers chase the topline, they are willingly falling prey to corporate demands."