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Patterns
in the insurance sector after liberalisation have so far
contradicted the predictions of those who argued that
this would deliver lower prices and better services for
consumers.
Despite what people in general are told, there are very
few things in the discipline of economics which are
undisputed. Much of what is presented as "obvious" or
"inevitable" often has poor foundations in theory and
little justification in terms of empirical experience.
Recent theoretical work indeed tends to point to the
fragility of assumptions that underlie many established
axioms. Truly, economics is at best an inexact science,
highly probabilistic, and ultimately dependent upon
intuition or "hunch".
Nevertheless, there are some arguments which are almost
universally accepted (given the famous ceteris paribus
condition, "other things remaining equal"). Thus, one of
the first things that all students of economics are
taught is that when there are more producers in the
market, competition tends to drive the price down to a
level which is lower than when there are fewer
producers.
The same is therefore supposed to be true of markets
which were previously closed to competition, and are
opened to new entrants. The expectation is that when
monopolies or oligopolies are forced to confront new
players, they will respond by lowering their prices or
improving quality, even if the new entrants have higher
costs to begin with.
This is why supporters of the Insurance Bill 1999 argued
that opening up the sector to more domestic and foreign
competition would ensure much better conditions for
consumers. It was argued that more products (in the form
of new types of insurance policies) would be available
and that premium rates would fall, as new entrants
offered them, and the existing nationalised insurance
companies would be forced to deal with the threat and
even reality of competition.
But such are the peculiarities of economics in the
current context, that even this obvious expectation has
been belied. In fact, so far precisely the opposite
tendency has been observed. Several new insurance
companies, almost all with some foreign backing as well,
have entered the market over the past six months in
particular. Yet on 1 July, a number of nationalised
general insurance companies took measures to raise rates
of premium and actually reduce the number of policies on
offer.
The
rates offered for vehicles insurance show this very
clearly. Rates of premium on cars have gone up by around
40 per cent on average. Meanwhile a category like third
party insurance for two-wheelers, for which premium
rates used to be quite low, has increased by nearly
three times. Some companies even plan not to provide
insurance for this category at all. When questioned
about these increases, insurance officers have pointed
to the effect of the new multinational-assisted entrants
into the insurance business, and the much higher rates
they are charging !
In other words, what they are suggesting is that now
competition is going to be based not on prices, as was
fondly believed earlier, but on profits. Insurance
companies, not just the private ones but even in the
public sector, are anxious to show profits on all lines
of activities. Indeed, the public sector companies are
especially keen to show that they are no less efficient
than private players, and therefore end up using very
similar tactics.
What this means most starkly is that the
cross-subsidisation which was characteristic of the
insurance sector earlier, and which indeed is typical of
most public sector service provision, is disappearing.
The general insurance companies have already been
instructed to calculate profits on each line of business
separately. Life insurance is likely to follow suit.
The irony is that both the Life Insurance Company and
the general insurance companies were already highly
profitable in the aggregate. Their cross-subsidies,
which were based on some notions of income and ability
of people to pay, and the need to provide insurance
services to as many people as possible, did not prevent
them from providing large surpluses to government
coffers. Now, however, because they are concerned about
showing profit rates or margins which are comparable to
those of the private sector, they are likely to turn
more cautious and more stingy about providing insurance
cover to a range of consumers, simply in order to
maintain "competitive" profitability. |
