Detariffing regime is an era whereby general insurance providers offering fire, engineering, mediclaim and motor insurance have

been given the freedom to decide the premium to be charged. The cost for an insurance policy was earlier decided by the Tariff Advisory Committee (TAC). This was implemented in two phases first started on Januray 1, 2007, when the insurers were permitted to increase or reduce premium by 20% on both sides from their then existing pricing. During this phase the product terms and conditions couldnt be revised. In the second phase, which came into effect on March 2008, complete freedom on pricing had been granted, including customisation of product according to each individual. So, if you are looking for insurance, be ready to be bombarded with questions in the detariffed regime. People seeking fire, engineering and motor cover would be subjected to a rigorous enquiry, before being issued a policy, especially if they have a history of claiming damages. The premium amount of an insurance policy can be either loaded or discounted, based on several risk factors, as against the earlier norm of fixed premium prices for a particular sum assured in a category. A Bihar resident asking for coverage against floods would be quoted a higher premium, while a person from Rann of Kutch would be given discount. The reason being, Bihar is geographically at a higher risk of flood as compared with the Rann of Kutch. Thus, the insurance company sees more chances of the Bihar policy holder claiming flood damages. Similarly, if you want to insure your car, the policy premium would be based on the model, colour and type, apart from your claims history. The premium amount quoted to a person seeking an insurance cover in an accidentprone city is higher. Therefore, the due diligence process for picking up a general insurance product would become more time consuming, as you would not get a fixed chart of premium amounts.

The insurance company would first ask you to answer a lengthy questionnaire and then provide a premium chart based on your answers and declarations. Depending on five risk factors, an insurance provider would either ask you to shell out extra bucks for the cover or offer heavy discounts. However, experts warn consumers to be careful of falling for excessive discounts. The provider who is offering tempting discounts may later ask you to pay additional costs under the disguise of service charges or investment charges, said an industry observer. Instead of just going for discounts, investors should also check for the services an insurance company provides, such as a cashless claims process or a shorter claim-waiting period. Insurance cost for a dark colour car would be a level higher because such cars are subjected to higher accident risks. Further, insurance companies would hike the premium amount for certain car models, having a low-safety record. Earlier, you had to pay a fixed premium, but now the premium would differ, based on the model of the car, the colour and the roads that it would hit. As a result, the due diligence process for picking up a general insurance product would become more time consuming, as you would not get a fixed chart of premium amounts.

2nd matter

As previously reported, the Indian general insurance market is in the midst of a transition from a tariff based regime to a more market driven system. To this end, the Indian insurance market regulator (IRDA) announced in December 2006 that rates for tariffed products would be freed as of 1 January 2007. Under the original plan, the Tariff Advisory Committee mandated policy wordings (insuring clause, terms, conditions, clauses, warranties, etc) would have to be used until 31st March 2008. After the date, the intention was for policy wordings to be freed as well. Following de-tariffication, the first steep premium rises were seen in third party rates for motor policies. It was reported that transporters were being asked to pay 126-150% more for third party cover. Transporters threatened a nationwide strike and, on 23 January 2007, the IRDA stepped in to regulate the motor rates that could be charged by Insurers with retrospective effect from the date that rates were freed - 1 January 2007. In other market lines, premiums have seen a marked decline. Firm statistics are very hard to obtain, but market feeling following the renewal season that coincided with the Indian financial year end on 31stMarch is that rates for middle to larger customers have come under severe pressure due to a combination of reasons, including Insurers anxious to gain market share in a new market; brokers aggressively driving down rates (and their own commissions) to retain clients and Insureds showing a remarkable willingness to move business to the lowest bidder. In a tariff market with each Insurer obliged to sell the same product, the only differential that an Insured will focus on and negotiate is price, and that is what has happened. As mentioned earlier, 31st March 2008 was to have been when the policy wordings would also be de-tariffed. However, the IRDA has announced that it is pushing back this date. In a letter dated 26th March 2008 to all General Insurers, the IRDA decided that pending examination of common market wordings proposed by General Insurance Council, Insurers shall continue to use the coverage, terms & conditions, wordings, warranties, clauses and endorsements of the erstwhile tariff classes of insurance covers until further orders. There was a view amongst some that the General Insurance Council (GIC) common wording contradicted the desire for a de-tariffed market, and was not

needed at all. Others felt that, if there was a need for a common wording, then the market should continue with the tariff wording which is at least familiar. A third group expressed the view that a common wording should not be rushed. It appears that the IRDA shares that view. The issue remains, however, that the market will be following the tariff wordings for now for an indeterminate period. The IRDA has given no other explanation for the postponement of de-tariffication beyond that quoted above, and no indication of how long the review of the GIC wording will take. One of the unintended effects of partial de-tariffication, leaving the policy wordings fixed but allowing free pricing, seems to be the pressure on premiums that has characterised this latest renewal season. It will be interesting to see what the effect will be if partial de-tariffication continues through another renewal season.

Current scenario and challenges.

Detariffing in the insurance industry has definitely shaken the industry. The premium income has come down sharply, competition has intensified and the insurers are facing the heat to retain business. The coming days will not be easy as the insurers will have to move with a strategy to balance the premium with risk and this will require expert risk managers to advise clients for proper insurance coverage. The general insurance business in India was detariffed w.e.f. January 1, 2007. Before detariffing, it was widely believed that detariffing will sharply bring down the rates and hot up the competition in the general insurance sector. This belief was not untrue. Detariffing resulted into severe competition among the general insurers. There was cut-throat competition for grabbing the corporate portfolios. The premium came down sharply. In some cases, it is learnt that up to 70% discount was offered to undertake the insurance business. However, on an average, the discount ranged between 4050%. The offshoot of detariffing has been: Intense competition.

 Sharp drop in the premium. Reduction of premium is more evident in the corporate portfolios. No reasonable basis for the reduction in the premium. In case of retail/small portfolios, the premium cut was less due to ignorance about detariffing of insurance market. The premium reduced irrespective of the quality of the risk management practiced by the customers. Direct impact on the balance sheet of insurers...

Profile on India - Impact of Detariffing: A General Insurers Perspective - A Step in the Right Direction
Mr Antony Jacob, Managing Director of Royal Sundaram Alliance General Insurance Company Ltd, which is a joint venture between Sundaram Finance of India and Royal & SunAlliance of UK, presents a private-sector non-life insurers perspective on the impact of detariffing in the Indian market, particularly for consumers. The general insurance industry has matured progressively over the last few years. The entry of a large number of Indian and foreign private companies has led to greater choice in terms of products and services. Increased consumer awareness of the benefits and importance of insurance and reinsurance has generated many more buyers. Private general insurance players have grown rapidly to capture a third of the market and helped to push the industry growth rate. The insurance penetration has grown from 0.4% in 2000 to 0.65% in 2005, and the potential is still great. In fact, the market is likely to double in the next four years to about 40,000 crore of premium income by 2010. Changing Trends The general insurance industry is set to see a number of changes in the next few years. These include abolition of tariffs, increase in foreign direct investment (FDI) limits and introduction of new innovative insurance products and solutions. We believe that after licensing of private players in 2000-2001, detariffing is the next big event in the Indian non-life insurance space. It has the potential to transform and liberalise the insurance market further and lead to the Indian market achieving global standards in underwriting and risk management. In global insurance markets, the abolishment of tariffs has resulted in five major benefits to consumers and companies.

Greater price competition based on actual risk characteristics and claims experience Greater focus on product features and the delivery of world-class service Greater awareness of the need for independent advice in risk management and risk services

Greater access to insurance purchase and renewal through brokers, call centres and the Internet Greater regulatory oversight, control and involvement - in the UK, the Financial Services Authority (FSA)s 2,600-plus employees

As has been witnessed in the insurance industry in developed countries, there is significant potential and scope for growth for the insurance industry in India. When the markets open up value-added features, good-quality service and state-of-the-art products are expected to increase considerably. There would be better risk management practices. More players and specialist mono-lines companies will emerge. At the same time wellmanaged insurance companies will grow from strength to strength and the current focus on revenue will be replaced by value. In effect, we will witness three phases of evolution in the Indian insurance market. Phase 1 - Pricing Freedom Insurers will have the freedom to price their products, while the existing terms and conditions of the product remain the same. Detariffing will see a shift in the way risks are currently rated. Pricing will vary based on inherent risk at the individual level rather than at a broad category level. Phase 2 Product Differentiation In the tariff-free regime, product differentiation is expected by April 2008. There would be considerable scope for insurers to introduce innovative products and value-added features in the market. Phase 3 Maturing Progressively The third phase would be the transition of the Indian insurance market from an infant phase to a mature phase. Although the Indian market has experienced substantial growth in the past five years, it is still early days. Currently there are only 14 general insurance companies operating in India, whereas in developed markets like the UK there are more than 400 companies operating. In 2005, the insurance penetration in India, as a percentage of the gross domestic product (GDP), was at 0.65%, whereas in the UK the penetration rate was at 3.68%. As the Indian insurance market develops, more players and specialist mono-line companies will emerge and the market will become more sophisticated and will attract global competition and capital. Implications of Detariffing Almost four decades of a tariff-controlled environment, has left our insurance professionals with limited exposure to sophisticated technical pricing based on actuarial data analysis. This is not a comment on our

inherent competencies but simply a reality of our experience in operating in a relatively closed market. Most international players who operate across countries which themselves are at different levels of maturity and growth and which also service different customer segments are extremely skilled in these aspects. All the players in the insurance industry are tapping extensively into the resource and competency pool of their international partners to develop suitable skills in the local environment. Now that detariffing is a certainty, its realisation is only a matter of time. Although in the Indian market context, private insurers are just over fiveyears-old, it is important for them to come together and initiate an industrywide effort to collect and evaluate market trends to price products appropriately in a free market. This will enable insurers to develop knowledge and gain experience and set the stage for international best practices in risk assessment and underwriting in the coming years. In a detariffed market, both the customer as well as the insurer will benefit from the services of a professional broker. Brokers will not merely encourage price competition among insurers, but will have distinct value adds for both customers and insurers. They will play the role of a consultant in the true sense with risk management responsibilities. They will also ensure best possible cover is obtained from the appropriate insurer by seeing that all relevant facts (material and non-material) are incorporated in their submission. Looking Ahead The abolition of the tariff will increase the sophistication and globalisation of the insurance market in India. This has benefits for insurers, brokers, regulators, and most importantly, the consumer and corporations. Customers will get tailor-made products specific to their requirements and based on the actual risks they face, rather than an administered price that has very little or no relevance to actual risk characteristics in the current scenario. For example, a safety-conscious manufacturer with excellent quality control, fire detection and state -of-the-art suppression equipment, trained fire-fighting staffs, etc, will enjoy a far lower premium than a similar unit with little or no safety awareness or infrastructure. This type of price will also increase the significant responsibility of insurance companies to meet genuine demands while ensuring underwriting disciplines. We are convinced we have the skills and underwriting excellence to rise to this challenge. Customers that invest in risk management practices and have healthy historical loss ratios are often at a disadvantage in view of the tariff restrictions which fail to recognise the good and bad features of each risk regardless of quality of risk management within occupancy.

As there would be premium volatility, the need for the capital will be higher and the pressure on the profitability in the industry will make the survival of small companies difficult. Experience in the rest of the world will tell us that tariff abolishment results in overall decline in prices. With insurance prices falling but claims remaining at the same levels, profits will be under pressure. This will erode the margins required to maintain suitable solvency capital. Thus, additional capital will need to be infused. The insurance business, by its inherent nature, is capital-intensive. The opportunity for Indian businesses and Indian promoters to channel their capital is also great. Relaxation in FDI norms will allow international insurance majors to reinvest in their Indian operations without putting similar pressure on Indian promoters. Thus, it is essential that the pace of liberalisation continue in order to allow the Indian consumer to benefit from innovation and ensure that the Indian insurance industry earns its rightful position as a global major.
Adapted by IRDA Journals Jan 2007