Free Pricing takes toll on non-life insurers

Today’s ET had a front page article with the same headline “Free Pricing takes toll on non-life insurers” where it reported that the once lucrative Fire Insurance segment now makes private General Insurers bleed.

Its an interesting and important development because it could well become the case study in What not to do in a free pricing regime. Coz most of the current losses are being blamed on the price undercutting taken by these players to get more sales.

Non Life InsuranceSo one might be tempted to ask-Is price undercutting a good strategy?

I would say it is a good approach to capture the market share, but only if the following conditions exist:

– The final margins after the price cuts, still allow you to make “normal profits”

– If the above is not there, you have access to a source of funds that can sustain you for a long period in the market place.

– Also the nature of industry/product allows you to lock in the customers from shifting to competition or ensures a high wallet share.

If you ask me, Fire insurance which requires periodic renewals does not guarantee that the customer will be back with the same insurer next time also.Moreover given that most of these are corporate customers, it can be safely assumed that they would shop around for the lowest priced deal.

The worst impacted are the Private sector players, coz they had not built a large enough book, whose corpus could have given them returns to cover the operational losses in the interim. All these are relatively new entrants in the market.

It is not a surprise then, that some of these private sector players are looking for additional influx of funds or a party to even buy them out.The regulatory changes in General Insurance sector have just started and how the Insurance business pans out, will make for interesting case studies for Strategic Management 101.