Losses increase – Premiums come under pressure

In India, the natural perils of windstorm and flood (STIF) are automatically included in any property insurance policy. Weather risks, particularly monsoon rainfall, have always constituted a major threat. The process of global warming has made it more and more difficult to forecast the beginning and magnitude of annual monsoon rainfall. Between 1980 and 2007, weather disasters (floods, storms, droughts) caused overall losses amounting to US$ 53bn (2007 values). The main peril is flood, which accounted for about 77% of the overall losses and 66% of the insured losses over the said period.

The summer floods in 2005 (Mumbai Floods) exhausted nearly all the market players’ cat XL programmes for the first time ever. Due to the agreed net retentions, some of them had large losses that were not covered. There is already a broad consensus in the market that the rates, especially for flood risks, have to be adjusted substantially. Some insurers are considering the possibility of quoting separate premium rates, but this is not to be expected in the short term due to the shortage of claims statistics and especially to the fact that as of 1 January 2008 pricing controls have been removed in all lines of property insurance except motor third-party liability.

Market and market players in a learning process

For the insurance industry, the question is how the Indian insurance market will develop in the medium to long term. If there are no major loss events with large insured losses, pricing pressure will certainly be maintained for some time. Moreover, companies have in the past compensated underwriting losses with high returns on India’s booming stock exchange. Reinsurance capacity is generally available in good measure.

At present, however, India is going through a process of learning and adjustment. The market has yet to encounter a phase with a scarcity of reinsurance capacity that necessitates risk-based pricing. Generally speaking, the private insurance industry should in the long term offer coverage concepts, such as a pool solution with compulsory insurance for natural hazards. These require both technical know-how and financial resources, however. International reinsurers could provide both, but the scope for efficient risk transfer in India is limited at present. Reinsurance is mainly provided by the General Insurance Corporation of India (GIC Re), to which non-life insurers must currently cede 15% of their cessions.

« back  |  continue »