Unhappy with premiums, Munich Re exits India

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Munich Re, the world’s largest reinsurance firm with a premium income of nearly $50 billon a year has virtually pulled out of the Indian market, indicating that it will stay out unless premiums rise substantially.

Munich Re has been in India for over 30 years, providing reinsurance support to both public sector and private non-life insurers.

Reinsurance is a form of loss protection mechanism used by primary insurers that helps preserve their solvency. Reinsurance support comes in the shape of annual treaties.

A public sector insurance firm official said, “Munich Re has virtually sto­pped giving any kind of support to the Indian markets.” Munich Re spok­esp­erson Nikola Kemper said from Hong Kong, “We have very strict risk management and pricing requ­irements that also apply to the Indian market. To offer stability in the long run, pr­ices need to be risk adequate.”

Its exit was partly triggered by the low prices quoted by domestic insurers in the face of fierce competition.

The price of profitable businesses like engineering and fire risk covers has fallen by 90 per cent since the deregulation of risk pricing by the Insurance Regulatory and Development Authority (Irda) in 2007.

Take, for instance, Oil and Natural Gas Corporation (ONGC), which saw a $3 billion increase in its offshore assets and an increase in the scope of its cover. But it also saw a marginal two per cent increase in its premium for an offshore package insurance policy at $25.8 million for covering assets worth $36.7 billion. Last year, ONGC had paid a premium of $25.25 million for covering assets worth $33.7 billion.

Since large risk covers are all reinsured, a loss translates into claims on reinsurance companies. The four public sector companies pay at least 20 per cent of the premiums that they collect to reinsurers. The private sector pays double that proportion.

At least Rs 6,000 crore was ceded to reinsurers, including General Insurance Corporation (GIC), by public sector insurers last year. The private sector paid reinsurers about Rs 8000 crore.

The country’s largest insurance broker, J B Boda and Company’s chief executive officer, K L Nayak, said, “The intense competition has allowed companies to beat down premiums that were not acceptable to reinsurers like Munich Re.”

Munich Re’s restricted presence was also partly on account of the record $105 billion losses it suffered due to worldwide catastrophes. The premium drops in the country have triggered fears that reinsurers’ losses will mount.

But Munich Re’s pullout does not mean that it has completely left the Indian market. The company is otherwise present in joint ventures HDFC Ergo General Insurance Company and Apollo Health Insurance. Ergo is a subsidiary of Munich Re.

Its exit does not mean domestic insurers have no reinsurance support. Such support is now provided by GIC under an arrangement referred to as obligation cession. This implies that at least 10 per cent of risk business would have to be passed on to GIC to gets its reinsurance support.

Besides, new companies have also entered India. Bajaj Allianz General Insurance Company has tied up with Warren Buffet's Berkshire Hathway Reinsurance. French reinsurer SCOR Re and Korean Re are also making a beginning in India.

Yet, pressure is mounting on primary insurers to hike premiums. The public sector official quoted earlier said the finance ministry had written to all primary insurers to cut loss ratios (excess of claims over the premiums collected) to 70 per cent.

Post-deregulation the losses to earlier profitable portfolios have already reached 90-95 per cent with the drop in premiums.

An official of another public sector insurance company said, “Premiums will rise for different reasons. Pricing is a matter of various issues. Different players have different costs of managing things. Those clients with larger claims will have to pay higher premiums. Those with a good claims record will pay lower premiums.”

The managing director of a private insurer said, “Munich Re … has exited but there are many others to take up the business. Premium rates will not go up because Munich Re has exited but because of the instructions issued by the finance ministry to the four public sector insurers to raise premium rates on group health policies.”

“It is first time in the history of the insurance industry that the finance ministry has formally written to the four public sector insurance companies to raise the price for group health covers and individual health covers. They have asked the insurers not to underwrite unprofitable business. Although the circular is for the four public sector insurers, private players will take a cue from it. I think the market will see rates going up. From here on prices will go up and find their natural level for every portfolio,” he said.

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