International Underwriting

As January approaches , in the reinsurance world, there is the usual buzz about capacities (old and new), market trends on major renewals etc. The international market trends are closely observed by the Indian market reinsurance boffins to seek a guide for their own April renewals, being the beginning of the financial year and hence the season for major corporates to renew their reinsurance.

In the last 12 months of "de/re tariffing" the cost of insuring property risks have variously swung from a few tens of percents to many tens of percent till truce was declared and a nice round figure of 51% was agreed to - rather like a divine offering!

People felt that when a tariff market opens, traditional underwiters (read "developing/emerging" markets) will drop prices heavily in order to retain/gain market share - even if the bottom line is hit. Unlike mature markets which have seen boom and bust and would handle pricing matters more sensibly.

So it is instructive to look at Liability Insurances - a segment where there has been no tariff - though one suspects it is more out of neglect than intent!

But that apart, a segment of the industry driven by international reinsurance would logically exhibit greater stability. Or would it?

Various classes of Liability businesses have seen soft markets and overcapacity leading to drastic reductions in premium. And some innovative underwriting practices.

Like rating on turn over. On the principle that higher the turnover, higher the risk, you would expect international underwriters to load the premium similarly for an account. If the company has a 400 million turnover last year and paid 100,000 then when the turnover is 600 million the premium would increase and when it reaches a billion it would increase even more.

Now consider the practices of International underwriters.

On one end of the spectrum are underwriters who strictly rate on turnover with a clause which says that if the year has expired and you have achieved more than estimated the difference premium is payable. From the above example the premium would tend to increase 50% for the renewal and even more when turnover almost trebles.

At the other end are underwriters who rate on only closed accounting years. So even though you project 600 million or even a billion you will pay only for 400 million! This apparently is a strategy to "capture" the market. So the other end of the spectrum effectively undercuts the market by as much as 50%!

So much for international market norms. Makes you wonder why the poor PSU development officer is the butt of deprecatory humour when he is doing much the same - though without the jargon or the power point presentations.