A rate war is likely to break out in the motor insurance business following deregulation of the tariff, according to Dalip Verma, chief executive of Tata AIG General Insurance, one of the leading players in auto insurance in the private sector.

This is despite the fact that most insurers have been complaining that they have been making losses in auto insurance.

Speaking to The Economic Times, Verma said that the insurance market was inexorably moving to a free market.

"In case there is detariffing there will be a blood bath. Typically deregulation leads to a fall in rates as players cut rates to attract business, lose money and raise rates again. This leads to a boom and bust cycle," he said. He said that in such a situation it was important for insurance companies to start analysing information from now on.

"Tata AIG would not get into a rate war but would price each segment according to the risk profile," said Verma. He added that private insurers were in a better position to analyse data and identify which vehicles were likely to result in higher claims and price the segments accordingly. Certain cars, certain drivers and certain locations are better risks but at present the good drivers are subsidising the bad ones, he said.

He said that with the advent of the private insurers and the management information systems they have put in place more analysis is being done on the portfolio of the insurers.

"New insurers are quickly able to assess what claims from what cars are adversely affecting them and are in a position to take quick action" he said.

He also forecast an increased co-operation between auto manufacturers and insurance companies, with the insurers conducting independent tests on new vehicles, as is common in many parts of the world. Both insurers and the manufacturers have a common interests as anything which reduces accidents and increases safety of the passengers improves the rating for the vehicle.

Verma said that Tata AIG aimed to break even three and half years from the time it commenced operations. The company which started in April 01 expected to show positive results in balance sheet for the year ended March 05. To achieve this despite the uncertainties in the insurance business the company was going for a well diversified portfolio, Verma said.

"We want to write a balanced book so that the volatility from individual lines does not affect our book. So we do not want to he one line heavy" he said.