Detariffing means that the pricing of insurance policies are left to the individual insurance companies concerned, to decide and offer, based on their analysis and perception of risk.

Raghavan Krishnan

The general insurance business in the country was nationalised 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, with the rest shared by the private companies. But the growth of the private companies has been strident in the recent past.

Detariffing advantages

The IRDA has prepared a road map for detariffing all categories of general insurance business from January 1, 2007. 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.

How does it matter to consumers?

The consumer has not benefited much from the insurance liberalisation 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 analysing 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 subsidises 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.

Impact on Insurance Companies

Falling premium income without a concomitant reduction in claims is likely to bring down the profits of insurance companies, their solvency ratios and, consequently, their international ratings which, in turn, would affect their reinsurance placements and underwriting capability.

Only the fire and engineering risk business is profitable based on current tariffs, and the profit margins on these segments would now be put to severe strain due to competitive pressures.

Conversely, customers must also be on their guard to keep an eye on the financial health of their insurance company to avoid bankruptcy, which is a common phenomenon in the international market. Automobile companies will also be under pressure to reduce repair cost.

Role of Professional Intermediaries

World over, the concept of risk management has now become a part of corporate governance. Professional risk managers enable cost-effective protection through scientific methods of identification, evaluation and management of risk exposures.

Faced with daunting choice in selecting the right insurance cover at the right price from the right insurer, consumers will look up to domain experts such as insurance brokers for advice to get the best that the market has to offer.

Insurance broker vs agent

As per IRDA norms, an agent can only represent a single insurance company and market its products while insurance brokers obtain clients the best possible coverage from any insurance company.

Insurance brokers are professionals who assess risk, design the optimal insurance policy structure, obtain the best terms, execute insurance contracts and assist in the settlement of claims. Value-addition is provided in the form of innovative tailor-made products. Insurance companies are legally mandated to absorb their service charges within the premium paid by the insured. It will be the insurers who will be under pressure to justify the rates and performance and yet earn profits.

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.

(The author, Managing Director of Foresight Insurance Management Services (Pvt) Ltd, Bangalore can be reached at firmsco@gmail.com)

(This article was published in the Business Line print edition dated December 5, 2006)
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