January 2017 marked 10 years of de-tariffication of non-life insurance in India. This decade has allowed insurers to price insurance policies (with the exception of motor third party) based on their own analyses and perceptions of risk.

When the sector opened to private players in 2000 - followed by de-tariffication in 2007 - policyholders were given an opportunity to choose from a host of insurers offering competitive rates from both public and private insurers. Public sector insurers have been operating in India for a long time and have seen both tariffed and de-tariffed regimes while private companies have spent a major part of their time in the latter. The reforms were supposed to promote a free market, risk-based pricing and a level playing field. In theory, it all looked good; in practice it led to a price war.

Insurers tried to outdo one another by undercutting across all lines of business. A similar thing happened when marine cargo was de-tariffed in 1994. Marine was cross-subsidized by other profitable lines, and policies were sold for as low as 1 rupee. At present cross-subsidization is no longer an option as one LOB cannot make up for losses from another.

The table below shows the recent performance of the industry.

As we can see from above, the insurance industry in India has been suffering underwriting losses year over year. The bottom line seems to have little or no importance. While the industry has taken few steps to control the market, it hasn't had much impact. Lack of underwriting profit has led to over reliance on investment income. In addition, ever-increasing natural and man-made catastrophes, new risks and high litigiousness, have made the insurance business in India riskier than ever. Currently, a high interest rate environment is sustaining the industry. As it lowers - and it will as has been the experience in developed economies - it will leave us with no option other than a return to disciplined underwriting.

A successful enterprise should be able to produce profit from its core business and shouldn’t be reliant on ancillary income. The float that an insurance business generates (premium collected upfront that is used to pay claims later) can be used to expand and strengthen a company’s balance sheet, rather than maintain solvency ratios in absence of underwriting profits. For long-term sustenance, the industry in India needs to focus on underwriting profits and end the commoditization of the sector. With reforms such as opening of the reinsurance sector, listing on the exchange and, among others, the FDI up to 49%, the Indian insurance market remains an exciting place. Demography and under-penetration of insurance in India leaves much to be desired, but it is equally critical for all stakeholders to assist in building a sustainable model.