Insurers Warned Against Price Undercutting

The Central Insurance company of Iran has warned insurance firms against underselling insurance policies, even threatening them to reinstate official “rate setting” “for specific categories if they do not comply.

Abdolnasser Hemmati, CII’s new president, says regulating insurance rates would be necessary to save the industry.

“It [price regulation] should not be seen as a step backward; the competitive structure of the insurance industry needs to be modified based on standards,” Hemmati said last week.

As per law, the Supreme Council of Insurance has the authority to set minimum premium rates, but Hemmati says the body is averse to such intervention.

The CII has its own alternative supervision methods and wants to replace its past habit of rate regulation.  However, measures like lifting the insurers’ capital adequacy rules and launching an online platform to record insurers’ performance apparently seem to have little or no effect on the behavior of insurers.

Experts see a lack of technical knowledge on the part of insurance firms for calculating risks and reserves, and inefficiency of the online platforms as the key challenges for regulating the market.

Earlier in September, Hemmati called on lawmakers to confer the CII with new supervisory tools, admitting that the body has no efficient method to replace the current dysfunctional system.

Rasoul Tajdar, CEO of Alborz Insurance Company, in a strange move, welcomed CII’s intervention in the market saying that “some companies are not capable of calculating their own rates, which entails huge financial problems for them.”

“They will not be able to meet their long and mid-term commitments, like what happened for Tose-eh Insurance,” which went under in an infamous incident attributed to financial mismanagement and dodgy investment practices.   

Alborz Insurance, formerly a state-owned firm, is now among the top 5 insurance firms in Iran, though it is reportedly struggling financially.

 “Poisonous Category”

Personal auto policies have been repeatedly mentioned as the bane of the insurance sector. Purchasing a PAP in Iran is compulsory by law, which has made the category by far the largest item on insurers’ portfolios. However, unhealthy competition, mostly through price undercutting, have led to disruptions in the market.

PAP alone accounted for 41.5% of insurers’ generated premiums during the five months to August 21. This is while the health category came second with 20.4% of generated premiums.

However, the loss ratio stood at 168.5% for health category and 70.9% for PAP category, adding to concerns over the negative impact of the two categories on insurers’ portfolio. Personal Auto Policies accounted for the largest portion of paid claims at 38.7%.

In a recent move the government banned selling PAPs at low rates. Most insurance firms have been taking measures to address the challenges concerning the PAP category.

Majid Safdari, chief executive of Ma Insurance affiliated with Bank Mellat, says that his company has stopped selling PAPs altogether, branding it the “poisonous category.”

“We have employed scientific methods for calculating risks and reserves. As a result, we have no compounded losses,” he added.

Enquires by the Financial Tribune also show that some insurance firms have started contracting companies, instead of selling their policies directly to individuals. Moalem Insurance, Taavon Insurance, Kowsar Insurance and Pasargad Insurance are among the firms that have shifted their focus on companies claiming them to be customers.

Most bank-affiliated insurance companies are also focusing on selling policies through bank branches and bank affiliated-companies. Novin Insurance affiliated to EN Bank, Saman Bank’s insurance firm, Bank Saderat Iran’s Sarmad Insurance and Tejarat Bank’s newly established subsidiary Tejarat Nou Insurance fall into this category.

Risk News, a respected website specializing in the insurance industry, has called for the establishment of a central platform for issuing PAP and health insurance policies by the CII. This measure “would leave no room for insurers to use other (tricky) methods for underselling insurance policies.”

 The problems have been compounded by the fact that the CII so far has failed to come up with a clear definition of what it means by ‘’healthy competition.’’ It has banned selling policies at lower prices without offering workable and effective options.

 IIC Needs New Mandate

Private insurers were for long complaining about Iran Insurance Company’s dominance over the market, claiming that they are not capable of competing with the state-owned behemoth.  At the moment, IIC’s market share has dropped by 10% but insurers are still saddled with a plethora of problems.

All things considered, the Iran Insurance Company does have potential to help change the industry for the better. Ministry of Finance and Economic Affairs has been trying to change the role of the state-owned insurance firm to a more supportive entity rather than a commercial enterprise.

During the past three years officials have announced that the IIC should emerge as an innovator in the key industry.

Innovative insurance coverage is the catchword in today’s world. Being flexible in covering new types of risks helps shift insurers’ focus from the obligatory PAP category to innovative coverage.  It can also help strengthen the demand side of the market.

The body could also start investing in insurtech companies, which are gradually emerging in Iran.

Enjoying government support, the IIC needs to be pushed to take the lead in introducing innovative policies and providing the industry with efficient risk calculations. But the IIC has even more to offer.  

Sine only a limited number of universities are offering degrees in actuary sciences the IIC-affiliated university can and should strive to bridge the gap.

The CII, along with its affiliated research institute, could also come up with a clear definition of the oft-mentioned “healthy competition” and start offering insurance companies alternative marketing models.