BRAINWAVE                                                     

The general insurance business in the country was nationalized on January 1, 1973 by the merger and grouping of more than 107 non-life firms into four public sector companies.

The IRDA (Insurance Regulatory and Development Authority of India) Act, 1999, paved the way for the entry of private players into the insurance market, till then the preserve of the public sector. There are now 30 insurance companies in the market, of which 14 are in the general insurance business. The market share of the four PSU insurance companies stood at around 77 per cent as on March, 04, with the rest shared by the private companies. But the growth of the private companies has been strident in the recent past.

At present in the non-life insurance industry, Fire, Motor and Engineering are under the tariff regime. After liberalization of the industry and entry of private players it was expected that de-tariffing would be introduced across the board. In view of the continuous losses incurred by the industry in the past decade under the motor insurance, Insurance Regulatory and Development Authority (IRDA) had constituted the Justice Rangarajan Committee, followed by the S V Mony Committee to examine various issues in the Motor Insurance.

As a follow up of the recommendations, the Authority proposed to de-tariff the Motor – Owner Damage segment of the Motor Insurance Portfolio w.e.f. 1st January, 2007. IRDA on Dec 04, 2006 announced that insurance companies are free to fix premium from January 1, 2007, for fire, engineering, motor, workmen's compensation and other classes of business currently under tariffs, subject to the guidelines on `File and Use' of General Insurance Products stipulated by the Authority. However, the Tariff general regulations, terms and conditions and wordings applicable to these lines would remain "until further orders".

 The Tariff Advisory Committee decided, that the rates, terms, conditions and regulations applicable to fire, engineering, motor, workmen's compensation and other classes of business currently under tariffs shall be withdrawn effective from January 1, 2007. Consequently, these would be now regulated by the IRDA from next calendar year. However, the rates of premium applicable to Motor Third Party insurance business have been set out by IRDA.

However, most of the insurers expressed the view that Motor – OD segment alone should not be de-tariffed. They opine that either the entire motor portfolio should be de-tariffed or de-tariffing should be carried out in respect of all the segments currently under tariff. The argument put forward by the industry against partial de-tariffing is that it would lead to gross undercutting of rates resulting in cross subsidization and therefore substantial reduction in premium as was experienced when Marine Cargo Insurance was de-tariffed in 1994. On the other hand de-tariffing in one go may have an impact on the financial condition of the companies, at least in the short-term, though it may stabilize later on. The Authority is in the process of having deliberations with the industry on this issue.

Effects of Detariffing

A rate war is likely to break out in the motor insurance business following deregulation of the tariff .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. In such a situation it is important for insurance companies to start analysing information from now on. It also needs to analyse data and identify which vehicles were likely to result in higher claims and price the segments accordingly.

After de-tariffing, the companies will need to adopt aggressive strategies in order to survive in the motor insurance market. Otherwise past experiences have shown that, the big losers were those companies which did not select their risks and adopted a flat rate of premium & the winners were those who adopted a selective pricing and marketing approach, targeting profitable segments and avoiding loss-making ones.

With the view that overseas experience could be used as a guide, primary data analysis stress on the need for introducing a system which gives ratings based on risk attached or in other words Risk factor rating system. This system can provide statistically based pricing as opposed to current system existing in India which has become outdated say for e.g. cost of one bumper of High Value Vehicle may simply wipe out entire premium.

Tariff rates in India are currently based on three rating factors:

·         engine capacity of the vehicle;

·         sum insured; and

·         geographical location.

In contrast, the recently proposed tariff rates for Malaysia are based on nine rating factors:

·         use of vehicle;

·         number of drivers;

·         age of vehicle;

·         make of vehicle;

·         geographical location;

·         driver's sex;

·         engine capacity;

·         number of claim-free years; and

·         sum insured.

Detariffing advantages

According to the IRDA, the advantages of the detariffing are encouragement to scientific rating and adoption of better risk management practices; elimination of cross-subsidisation leading to independent pricing for each line of business; development of innovative practices, and generating customer-friendly options for the policyholders.

The proposed detariffing in the general insurance industry would lead to a major shift in the focus of the companies, resulting in higher penetration in the country.

Detariffing entails moving from rule-based underwriting systems and practices to risk-based decision-making of the subject matter offered for underwriting. It means that the pricing of insurance policies is left to the individual insurance company, based on an analysis and perception of risk. Competition is expected to whittle down the fat margins that insurers enjoy in fire and engineering insurance, eliminate cross-subsidies and force companies to look at small businesses.

To retain customers in a competitive scenario, insurers will focus on customer service as a key differentiator. There will be an increase in the use of virtual channels to reach out to and service customers in order to reduce operational costs and pass on these benefits to the end customer.

The move to detariff is also likely to hasten the process of infusing more capital into the private insurance companies as and when the parliamentary approval is obtained for the Finance Ministry proposal for increasing the foreign direct investment limit from the present 26 per cent to 49 per cent.

Detariffing: Risks and Challenges

Price differentiation

After detariffing there could be a possibility that different companies follow different models and mechanism to reduce its products prices comparative to competitors. But, even if an insurance company is reducing prices, IRDA will demand the statistical basis of reducing prices. So there would not be much price differentiation. So price war kind of situation will be avoided since the IRDA is putting its requirements, where it won’t allow a company to reduce its prices beyond a point.

Little time to change

At this point the insurance industry has very little time to grapple with these huge changes. What would ideally take a few years to implement is being put into action in a few months, say insurers. So people want more time to digest and understand detariffing.

Training intermediaries

Training intermediaries and entire distribution force, on the new paradigm will be a challenge. Today under the tariff, people just look at a chart and tell you the price of your car insurance. But after detariffing, every company will have its own method of calculation, and you have to make sure that your staff, the customer and everyone understands that. So training will be the key challenge to insurance companies.

Customer awareness

Customer awareness regarding all these changes is also essential. Because after introduction of the term detariffing customers are little bit confused that how would this all give benefit to them or this is again just a hype of something. Some customers do not know about this at all, so there is a proper need to educate them.

There are measures that the IRDA along with the General Insurance Council will take. They will come out with a media campaign in the next few months to explain to the public what detariffing means.

Other Challenges

These are not the only challenges that this burgeoning industry is facing. Insurance companies need to concentrate on product development and brand building, which many insurance companies have now become active towards. They need to also contain the talent resource, thereby providing good incentives to employees and retaining talent. Insurance has not been looked at as a preferred job in the past, but now it is pretty much in demand, thus companies need to devise ways to source and retain talent.

Consumers’ Benefit

All said and done, though the insurance companies may not welcome the loss involved but the benefits that it brings to the Indian consumers cannot be overlooked. The premium outgo from the customers' end would be far less compared to the present tariffed rates. Besides, the Indian consumer would have a lot more options to choose from and the also services offered by the insurance companies might become more competent.

The consumer has not benefited much from the insurance liberalization process. Under the market regime, the insurance companies will be forced to rate risks scientifically. The only way insurance companies can make profit and, thereby, maintain their solvency ratio without going back to their shareholders is by prudent underwriting.

The downside is that the balance-sheets of non-life insurance companies could be splashed in red, and buyers with small insurance needs may be ignored.

On detariffing, the rating will be based on the risk profile of the customer; it will be in the customers' interest to make his risk profile better. A risk should be judged on its own merits and detariffing will force insurers to scale up their risk-assessment capability and give the underwriting function its due importance in the insurance process. After all, this is the core function of analyzing and pricing transfer of risk. By far the biggest impact of detariffing would be on motor insurance. Here too, good customers would gain. Now, a car-owner with no claims subsidizes another who makes large claims. In the detariff regime, car-owners with a good track record will gain.

Barring commercial motor vehicles and medical insurance, premium on assets (that is, fire, engineering and property risk covers) are forecast to drop by at least 40 per cent in a detariffed regime due to intense competition.

The premium for trucks and other transport vehicles is expected to go up substantially as the related claims ratio, especially for the third party legal liability segment, has been very high and the premium charged has not been commensurate with the risk exposure.