Property and Infrastructure Insurance - Past, Present and Future

The Property Insurance market in India is expected to witness significant growth in the coming years.

For FY 2023-24, the market size, measured by the gross written premium was ?25658.62 Cr growing at a rate of 7.22% (23931.73 Cr in FY 2022-23) with a market share of 8.86%.

This indicates a promising potential for the industry in the country.

As India continues to develop and expand its property market, the Property Insurance market segment has a promising future with opportunities for growth and investment.

India's property insurance market is experiencing rapid growth due to increasing urbanization and the rising awareness of the need for protection against natural disasters.

Experience of DE tariffing:

However, the property insurance market continued to remain tariffed until 2007 after which pricing freedom was given to the insurance companies, with terms, conditions and wordings remaining regulated by IRDA instead of TAC, which was converted into the Insurance Information Bureau (IIB) tasked with being statistics repository for the market.

As was widely expected, the free pricing regime led to a dramatic fall in rates across the board. Even though insurance companies were required to file their rating logic with the regulator, get prior approval, and apply the same in the market- that did not pan out as expected.

The abundance of reinsurance capacity with the expectation of double-digit growth of premiums, despite sum insured exposures going up, led to overheating of the competitive forces in the market. The file and use system did not work to arrest the steep decline in the pricing that followed.

With deteriorating loss ratios from 2010 onwards and the Thailand floods that followed, the reinsurance market hardened.

Market corrections:

Demands for better sanity in pricing, particularly on increased Natural Catastrophe losses, led to the introduction of minimum rates for flood and earthquake perils in 2011. Before this, the market also adopted a minimum deductible regime applicable to property and engineering lines of business in 2010.

The minimum rates for NATCAT perils, led to further erosion in non-NATCAT fire premiums, leading to negligible or often no premium being charged for these perils. Essentially, the market started operating just on NATCAT rates for all the fire policy perils put together.

Average rates had been dropping despite underlying risk exposure and claims inflation going up year on year.

The General Insurance Council was quite actively nudging the insurers to adopt a burning cost approach to pricing. Based on the efforts of the Council and the IIB, the first attempt at publishing burning cost for the industry was made and rates for a limited number of occupancies as per erstwhile tariff were published.

The IRDA, concerned by the unsustainability of rates in the property market, instructed the insurers to adopt the industry burning rates or develop their system of internal burning costs to be adopted. However, these instructions also did not help to address the situation. The Burn cost rates were not revised periodically & also Insurers were not able to load the burn rate with management expenses & cost of business acquisition (commission /brokerage) because of intense competition.

IRDA introduced three new policies w.e.f. 1st April 2021. These were Bharat Sookshma Udyam Suraksha for risks with insured values up to or below 5 Cr, Bharat Laghu Udyam Suraksha for risks with insured values ranging between 5 Cr to 50 Cr & Bharat Griha? Raksha for all residential risks (individual dwellings/ cooperative housing societies). While these came with tailor-made simplified wordings & lower deductibles, Insurers were allowed to file discounted rates basis good features, age of building, fire protection systems available, and nil claims history. This resulted in massive price drops for these policies & today the industry is battling with adverse loss ratios of 140%-160% in this segment (in particular Laghu & Sookshma).

A key reason for the burning cost regime not holding in the market has been the abundance of proportional reinsurance capacity for the players.

The National Reinsurer, GIC Re had introduced measures such as the loss participation clause, which requires the cedant to partake of losses if the treaty loss ratio exceeds a certain threshold that did not result in pricing correction.

Usually, such restrictions do not yield a price correction but only suppression of capacity which is compensated by an oversupply of cheap, non-technical capacity in abundance in the market.

It was realized by the Reinsurers that pricing could not improve unless the reinsurance capacity was not linked to pricing. Hence the reinsurers amended the market treaties to the effect that the capacity is contingent on minimum rates as published by IIB being charged with loading for NATCAT perils.

Present situation:

With effect from 1st April 2024, IRDA has allowed complete detariffication of all products including Fire. Insurers have been asked to work on & file bespoke policy wordings while retaining the existing wordings. This has resulted in a massive price war with Insurers reducing IIB rates by 25%-30% to target new clients / retain renewals on 1st April. Over the 1st quarter, the discounts on IIB have reached 90-100%, especially for the preferred risks segment. There have been many cases where even NAT CAT rates have also been breached (below the minimum market agreed rates). While this is a win-win situation for clients, it has led to huge concerns for Reinsurers & Insurers. There is talk of Reinsurers hardening their approach to proportional treaties & incorporation of loss limit clause in the treaties (which would limit their losses but add to the Insurers' net losses). The challenge with the Indian property insurance market has been to balance the need for growth in the written portfolio with maintaining risk-adequate premium rates.

Way forward:

Indian market needs to find a way to move towards risk-based pricing based on underwriting fundamentals. One can hope that with the maturation of the market, this aspiration will be fulfilled in the future. With free wordings, free pricing & hardening of the Reinsurance markets, and natural calamities taking place every year in some geography or the other, price correction is expected to happen in the next 1-2 years. The insurance industry needs to come out of the L1 mindset – the largest of corporates seldom talk of risk management practices but invariably who can get the L1 price for them. Insurers & intermediaries also end up playing the game since it’s a matter of survival. This has increased arbitration & litigation since many Insurers & Surveyors take a hard stand on high-value claims.? Catastrophic losses will keep happening -such as Teesta Urja project insurance which resulted in a total loss of 12000 Cr for the client but the Insurers may end up paying only 500 Cr as there was a loss limit of 500 Cr towards GLOF (Glacial lake outburst flood) –this is likely to end up in Arbitration & the Courts ultimately. The insurance industry needs to work on arriving at an optimum balance & have a horses-for-courses policy (good clients who believe in and invest in sound risk management practices, don’t report frequent claims, and are willing to go for higher self-imposed deductibles should get the benefit of the widest & most comprehensive covers at competitive prices, as opposed to clients who do not invest in risk management practices and believe insurance is a cost rather than an investment).