The General Insurance market got detariffed during 2007 and Post de-tariffing of market the general insurers in India have free market approach to price their products except for motor third party insurance. Sustainable growth is the life line for any business and insurance is no exception to it. Insurers must have the 360 degree view of their business .The Regulator, who watches the interest of the policyholders, however observed that despite its advisories the free market regime coupled with intense competition amongst insurers & their obsession for the top-line is resulting into deficient assessment of insurable risks, in corporate sector, and that the prices are offered to these corporate clients for property insurance and group health insurance at non-viable rates which are ultimately subsidized by the buyers of retail products. Due to aggressive competition the insurers were offering heavy discounts on portfolio basis to retain their accounts and were quoting less than 25 to 40% below the estimated outgo in fire and engineering segment to attract new corporate.
These corporate with loss making products continue to escape price hikes by shopping for new insurers. The chase to build up top line and the pressure on marketing force of the insurers for their targets resulted in insurers willingness to accept the business even not covering expected claim cost ignoring loading for inflation, acquisition cost, servicing cost by third party administrators and management expenses.
In a bid to address this issue and to bring corporate governance in the business behaviour of the insurers the Authority has prescribed its pricing prescription which is applicable with the 1st day of 2015. The Authority’s prescription for pricing fire, property and group health insurance is to consider Burning Cost as starting point to price these risks. This only can move market forward towards claim plus pricing mechanism. Burning cost is the estimated cost of claims in proposed insurance period and is calculated from previous year claim experience of the insurer duly adjusted for change in number of lives and for changes in the benefit design proposed for current year of the risk. IRDA in its advisory and prescription has made it very clear that industry-wide losses should be considered for pricing the product and insurers current level experience of acquisition and management expenses should be loaded to it.
The industry-wide burning cost is available with IIB (Insurance Information Bureau of India) for Fire and Property Insurance but such industry-wide burning cost for group health is not available. The Authority is also aware that brokers are not disclosing all details of group health experience to insurers at the time of RFQ (request for quote). In health insurance the trend & incidence rate usually does not vary from year to year. However, the average claim cost bears the impact of medical inflation to some extent. Till the IIB is ready with the industry-wide Burning cost in group health segment the authority has tightened the reporting parameters. It has prescribed that the intermediary or the client will mandatory have to sign and disclose the claim cost of last year and preceding two years in the input format designed by General Insurance Council of India (GI Council). This will surely improve the disclosure and will put insurers in a better position to assess the risk on quality data necessary to price the risk.
With uniform data now available to underwriters if any of them choose to price the risk lower than burning cost than it will have to have the approval of its top management. Further this will have to be filed in form of Exception Report in a format to be designed by IRDA.
The Regulator has initiated this move to see right pricing coming into the market and corporate governance in the business behaviour of the insurers. The move signals that premium for this growing portfolio would be rising or else there will be reduction in the benefits.
It is a time now to watch whether the insurers will now move to a more realistic market or they are looking something else.
Few burning cost rates in fire occupancy is narrated below:
| No. | Main occupancy | Tariff code | Tariff occupancy | Burning cost |
| 1 | Textiles | 5305 | Cloth Processing units situated outside the compound of Textile mills | 1.05 |
| 8907 | Garment Makers, Topee, Hats and the like makers | 0.99 | ||
| 10308 | Hoisery,lace, Embroidery/Thread factories | 1.17 | ||
| 11115 | Jute Mills | 2.75 | ||
| 11512 | Leather Cloth Factories | 2.11 | ||
| 12104 | Man-made Fibre Manufacturing (using Cellulose) | 0.65 | ||
| 12205 | Man-made Fibre Manufacturing Plant (Others) | 0.71 | ||
| 13411 | Non-woven fabric Manufacturing | 1.72 | ||
| 17106 | Silk Mills / Spun Silk Mills | 0.99 | ||
| 18907 | Textile Mills – Composite mills (Composite Mills are those where activities from Blow Room to Cloth processing are involved) | 0.82 | ||
| 18908 | Textile Mills – Spinning mills | 2.33 | ||
| 19909 | Velvet Cloth Manufacturing | 1.47 | ||
| 20206 | Weaving Mills | 0.75 | ||
| 20705 | Yarn Processing | 1.13 | ||
| 2 | Plastics | 8415 | Foamed Plastics Manufacturing and / or converting plants | 2.66 |
| 14809 | Plastic Goods Manufacturing (upto 15000 btu/ib) | 1.93 | ||
| 14812 | Plastic Goods Manufacturing (excluding Foam Plastics, above 15000 btu/ib)) | 1.93 | ||
| 16309 | Rope works (Plastic), Assembling of Plastic Goods such as Toys and the like | 1.44 | ||
| 3 | Rubber Good Manufacturing | 16511 | Rubber Factories | 1.76 |
| 16612 | Rubber Goods Mfg with Spreading | 2.07 | ||
| 16709 | Rubber Goods Manufacturing without spreading | 1.56 | ||
| 19608 | Tyres and Tubes Manufacturing | 1.26 | ||
| 4 | Chemical Manufacturing | 4311 | Chemical Manufacturing(Using materials with Flash Point below 32OC), Bulk Drug Manufacturing | 1.94 |
| 6809 | Distilleries | 1.24 | ||
| 6609 | Detergent Manufacturing with Sulphonation Plant | 1.43 | ||
| 7908 | Fertiliser Manufacturing (other than those rateable under Petrochemical Tariff) | 1.25 | ||
| 14007 | Paint factories (Water based) | 1.5 | ||
| 14113 | Paint (others) & Varnish Factories | 2.27 | ||
| 14215 | Paints – Nitrocellulose based | 2.76 | ||
| 5 | Storage of Category III | Storage of Category III | 4.24 | |
| 6 | Transporter Go downs | Transporter Go downs | 3.6 | |
| 7 | Steel Plants | 805 | Aluminium ,Zinc,Copper Factories | 0.71 |
| 7504 | Engineering workshop | 0.25 | ||
| 8 | Power Plants | 7004 | Electric Generation Stations – Hydro Power stations | 0.4 |
| 7005 | Electric Generation Stations – Others | 0.4 |
The circular shared by GIC is also depicted below:-
Thus the burning cost is the experience based insurance rating method commonly used in determining rates and is the ultimate tool that helps the underwriter to price the risk.
