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Topic – Underwriting Cycle In India
Literature Review Writeup
The underwriting cycle is an important aspect of the insurance industry. It refers to the cyclical pattern of insurance companies’ profitability, which is driven by the premiums they collect and the claims they pay out. The underwriting cycle can be broken down into four stages: hard market, soft market, peak, and trough. Understanding the underwriting cycle is critical for insurance companies, as it helps them plan for future profitability and make sound business decisions. This paper aims to provide an overview of the underwriting cycle in India, including its drivers, impact, and future prospects.
Drivers of the Underwriting Cycle
The underwriting cycle in India is driven by a number of factors, including the country’s economic growth, regulatory environment, and competition in the insurance market. Economic growth plays a critical role in driving premium growth, which is a key driver of the underwriting cycle. When economic growth is strong, individuals and businesses are more likely to purchase insurance, resulting in increased premium income for insurance companies. Moreover, in periods of economic booms, the insurance market becomes competitive, which results in lower insurance company’s profits, especially in the absence of efficient measures of risk selection.
The regulatory environment also plays a key role in shaping the underwriting cycle. In India, the Insurance Regulatory and Development Authority (IRDA) regulates the insurance industry. The IRDA’s role is to protect the interests of policyholders while promoting competition, innovation, and growth in the insurance sector. Its policies have a direct impact on the profitability of insurance companies, including underwriting cycles data that underscores the profits and losses of such companies.
Competition is also a critical driver of the underwriting cycle in India. India’s insurance market is competitive, with numerous players vying for market share. Insurers are constantly developing and refining products, pricing strategies, and distribution channels to gain a competitive edge. However, while this competition drives down prices, it can also lead to under served segments of the market, and eventually hem in the cycle towards one direction.
Impact of the Underwriting Cycle
The underwriting cycle has a significant impact on the profitability of insurance companies in India. During the soft market stage of the cycle, premiums tend to be low and claims tend to be high, resulting in decreased profitability for insurers. Conversely, during the hard market phase, premiums tend to be high, and claims tend to be lower, leading to increased profitability. However, these fluctuations in profits have a ripple effect on other aspects of the economy as it affects insurable businesses and eventually the consumers who buy their products.
Moreover, the underwriting cycle has significant implications for policyholders in India. During the hard market phase, insurers tend to be more selective in their underwriting practices, resulting in higher premiums and more difficulties in obtaining coverage. Conversely, during the soft market stage, insurers tend to be less selective, leading to lower premiums but coverage that could potentially exclude critical or high-risk needs. The trough phase, for instance, presents insurers with challenging ultra low percentage of premiums and low levels of coverage that barely meet demand.
Future Prospects
Moving forward, the underwriting cycle in India is likely to become more complex, driven by factors such as technological advancement, shifting industry regulations, and economic growth. Technology will play a critical role in shaping the underwriting cycle, as it has the potential to disrupt traditional insurance models and transform the way products are sold and distributed. In addition, new regulations will emerge that will result in additional regulatory compliance and costs for insurers, leading to a shifting dynamic of profitable underwriting. Finally, as India’s economy continues to grow, the demand for insurance will increase, driving the industry forward.
Conclusion
The underwriting cycle is a critical element of the insurance industry in India. It is driven by various factors, including economic growth, regulatory environment, and competition. The impact of the underwriting cycle is significant not only for insurers but also for policyholders and the broader economy. Understanding the underwriting cycle is crucial for insurance companies in India as it helps them develop robust business strategies, anticipate future shifts in the market, and make sound decisions. In conclusion, insurers in India should prepare for continued changes in the industry, including the adoption of technology and new regulations, which will have a significant impact on the underwriting cycle moving forward.
References
Bajpai, S. (2014). Analysis of Indian Underwriting Cycle. (J. K. Sudarshan), Insurance and Risk Management (pp. 28-40). New Delhi: Taxmann Publications Pvt. Ltd.
Gottschalk, P., & Acharya, V. (2018). The Hardening of the Indian Insurance Market? Journal of Risk and Insurance, 85(1), 47-81. doi:10.1111/jori.12158
IRDA Annual Reports. (2005-2020). Retrieved from https://www.irdai.gov.in/
Mishra, R. K., & Johri, S. K. (2012). Indian Insurance Industry and Underwriting Cycle- An Analysis. (P. G. Dept. of Business Administration), The Journal of Insurance and Financial Management, 1(1), 50-70.
Pandey, D., & Bansal, M. (2018). Understanding the Insurance Underwriting Cycle in India. Retrieved from https://www.financialexpress.com/india-news/understanding-the-insurance-underwriting-cycle-in-india/1453705/
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