Indian insurance market has undergone tectonic changes in last two decades; from entry of private players to abolition of tariff regime.
Last decade has been an era of expansion, an era of continuous growth in premium income. Now, we are again talking of profitability in insurance, in terms of underwriting profit.
As soon as we say underwriting profit, first thing comes to mind is prudent underwriting – proper risk selection. Many insurers are now defining their declined risk in separate lines of business. Based on technology and data, insurers are now able to analyze on many parameters like geography and other risk parameters, the risks which are having high claim ratio.
- Let us discuss risk selection – in light of fundamental principal of insurance i.e Law of large numbers.
If we continue selecting only good risk, we will essentially by decreasing diversity of our portfolio. It is like an old mistake of putting all eggs in one basket, which violates the basic law of large numbers in insurance. Let us try to gain perspective with a future possibility. For example – A company X may not expand its motor business in rural areas because business accusation and claim servicing costs are less in cities. The rate of return might be less in rural areas. This situation can turn around in next decade or so, with the increase in traffic, road tax and parking charges; car maintenance in cities might go up – rural areas might see increase in motor business in future. In such scenario, company X risk selection might convert preferable risk group in adverse risk group in next decade.There are so many social, political, macro – economic factors operation in our inter-dependant world that we perceive as favorable risk group might become adverse risk group in near future. Therefore, it is important to maintain diversity in our risk group.
- Profitability – If not risk selection then what ?
- Pricing – There are adverse risk. A risk with claim cost of INR 100 is bad risk at premium of INR 80 but is a good risk at premium of INR 120.
- Servicing – The serving aspect is one of the most important aspect in current competition scenario. There is a market segment which is ready to spend more money in insurance premium for same coverage, if service levels are better. If corporate can get there claim amount and renewal done with lesser hassle and in lesser time, it is money saved for them.
- Product Innovation – Though the insurers can not file and use their own products now, we have not seen many new products in Indian insurance markets in last five years or so. Every risk which is susceptible to more to some perils is also less susceptible to some other perils. Products can be designed in such a way of have mix of such perils, so insurers can cover both adverse and preferable nature of same risk.
Let profitability not come in the way of expansion of insurance and premium growth of insurers.
About the Author
Archit Gupta
Assistant Manager in UIIC
