FROM April 1, Indian corporates will have to bear a bigger slice of an insured loss from their own pockets. Till now, a company paid just Rs 10,000 out of its own resources if there was a fire or flood — insured events for which it had bought covers from non-life firms. Now, it will have to fork out as much as 5% of the claim, which could run into several crores.
Bitten by underwriting losses resulting from intense price war in the past three years, non-life insurers have taken a collective decision to fix a floor level for deductibles — the portion of risk required to be borne by the policyholder.
Although the industry association, General Insurance Council, denies that there is any agreement at the council level, brokers said at least two companies have issued identical circulars, which indicated a concerted effort by players.
For instance, a circular issued by Oriental Insurance sets out the minimum deductible applicable for all fire and engineering policies with effect from April 1. Earlier, the claims on policies with sum insured of above Rs 10 crore per location was Rs 10,000. Now the new limit is Rs 10,000, or 5% of the claim amount, which ever is higher. For a claim like the Indian Oil fire in Jaipur last year, the deductible would run into several crores, which will be a direct hit on the balance sheet of the company.
“The only discussion that took place in the council was that insurers should adopt prudent underwriting practices,” said a senior council official. Deductibles are considered a prudent underwriting practice to ensure that the policyholder has an interest in taking all loss prevention measures. Secondly, deductibles spare insurance companies of the administrative hassles involved in low-value high-frequency claims.
Deductibles not only reduce the claim payouts, but also substantially bring down the administrative expenses for general insurance companies. This would be a relief for non-life insurers who have been recording balance sheet losses amid a rate war that has left them bleeding. According to Pavanjit Singh Dhingra of Prudent Insurance Brokers, an increase in deductibles was expected as the current deductible levels were fixed in the ‘90s. “However, we believe that every insurer should ascertain and price risk according to their individual strengths and capacity. It seems that insurers feel that they cannot be individually disciplined enough to underwrite risks as per their own judgement and that a market agreement is required with all acting in concert to prevent one from undercutting the other,” he said.
The industry is also facing pressure from reinsurers. All reinsurance treaties are renewed with effect from April 1 and reinsurance companies are pressurising insures to be more prudent in their rates. “Treaties with non-life companies are not at all profitable and we are planning to put in restriction and are still discussing with the companies. However, we do not advise companies on either the rates or deductibles they should apply,” said GIC Re chairman Yogesh Lohiya.
“Another way of looking at this situation is that insurers are finding it difficult internally to enforce pricing discipline and are trying to curtail claims instead. From these steps and the difficulty that insurers are having with their treaty renewals makes us feel that we may see higher prices in the near future as well,” said Mr Dhingra.