Global reinsurers have started expressing apprehensions over the prospects of price cuts in the detariffed insurance regime, set to commence from January 2007.
"Though detariffing supports the development of insurance, the negative side is the price turmoil. Insurers will suffer from higher loss ratios as seen in Germany and it will take three to five years for the industry to stabilise," said Thomas Hess, chief economist of Swiss Re, today.
These remarks comes close on the heels of Munich Re, world's leading reinsurer, hinting at withdrawing support to Indian insurance companies in case of drastic fall in prices.
Karl Whittman, a director on the Munich Re board, last week had said that "Munich Re would not hesitate to lower its commitment towards the Indian insurance sector in the event of a price war".
Hess, however, said Swiss Re would support detariffing with its global experience. "Detariffing will also result in consolidation in the industry and family-owned companies will close down, leading to lesser concentration in the market," Hess said. He was addressing reporters on the impact of detariffing in India.
Currently 70 per cent of the non-life market (fire, engineering, motor and workmen compensation) are under tariff.
"Overseas experience suggest sharp changes in market behaviour once deregulation kicks in. The whole value chain of insurers have to be re-evaluated. It is not just pricing, but also claims handling, reserving and distribution. In a tariff-free regime, a few insurers who will not be making profits will restructure themselves," Hess said.
About the public sector versus private players in a detariffed regime, Dhananjay N Date, managing director of Swiss Re in India, said: "Public sector companies have larger balance sheets while private players are quicker in decision making. In last four years, private insurers have made inroads into the property and casualty insurance and private companies will continue to grow at the expense of the public sector companies."
Hess pointed out that detariffing of motor insurance proved to be a disaster in Italy as supervisors were pushing consumerism and that led to sharp downward movement of prices.
According to him, detariffing of certain segments in India also could prove disastrous. On the other hand, in Japan insurers gained market share with giving different rates for motor policies. "It was a strange idea but it worked," he said.
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