ROI on Sensex gains offsets underwriting and detariffing losses for general insurersIn spite of losses due to detariffing of the insurance sector leading to underwriting losses, general insurance companies more than made up by return-on-investment (ROI) incomes due to the booming stock market.
Apnainsurance.com Research Bureau
31 Dec 2007
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.
industry will usher in complete free pricing in January 2008.