An arm of the Insurance Regulatory and Development Authority, the Tariff Advisory Committee is all set to dismantle the Motor Tariff regime from April 2005. The Tariff, which at present governs the rates that insurers charge for motor insurance premium, will be substituted by the file and use procedure.
This will give the insurance companies the flexibility to structure the terms of their motor policies. Although private players will be free to price motor insurance policy after disbanding the motor ‘ damage’ tariff, they will have to file the policies along with their pricing structure with the regulator before selling them and the TAC is confident that the de- tariffing will not lead to predatory pricing.
The biggest deregulation :
This will be the biggest deregulation in the insurance industry since nationalization. Motor insurance accounts for Rs.6400 crore of premium. Of this, the own damage premium is around Rs.4300 crore. The remaining is from compulsory third party insurance. The TAC has no intention of de-tariffing the third party premium because of its statutory nature.
The last major deregulation was done in 1994 when the marine insurance tariff was dismantled. That was done when there were no private players in the market and the stiff competition was only among the four public sector general insurance companies leading to price wars and underwriting losses in the marine portfolio. That time even the IRDA was not in existence to vet insurance products. Now there is high competition for the comprehensive cover for new cars since this segment is not only profitable but also the fastest growing.
Motor insurance today accounts for over 35% of the premium income of non-life insurance companies. The portfolio witnessed 225% losses in the third party segment but the Tariff Advisory Committee has not been able to revise the tariff upwards because of protests from transporters. Now with the deregulation of Motor Tariff, the companies that intend to provide discounts will have to justify them, while those planning to include add-on features of motor insurance will have to show that these covers have been priced properly.
According to Insurance brokers, the public sector insurance companies, in particular, have witnessed a higher claim ratio of over 150% in the Motor vehicle segment. De-tariffing is expected to improve the health of these companies as they can hike the insurance premiums. However, the IRDA would prepare a plan of action and take up the issue with industry players before moving into overall de-tariffing in 2007-08.
Need to amend the Motor Vehicles Act :
There is a need to amend the Motor Vehicle Act. Currently, there is no timeframe for making claims under the Act, moreover, claims can be made by approaching Courts in any part of the country. The insurance companies have a large number of claims in different courts.
The problems relating to third-party claims can be overcome only if there is a cap on the limit of liability. Apart from the unlimited liability in the third party claims the motor insurance is currently bogged down with some problems regarding the rates and how claims are handled. De-tariff, in general, is inevitable in a highly competitive environment. It is a fact that in the transition stage, the insurance companies may come under severe pressure, as they have to compete with each other. However, the TAC would not allow any company to suffer from the initial transitional problems.
De-risking model for profitability :
Taking advantage of the softening of premium rates in the international markets, Indian companies with the large industrial asset, are purchasing Mega Risk policies, an umbrella cover where rates are driven by re-insurers. Big corporate are going for mega risk covers, which are helping them to save crores in insurance premiums.
Until now it was energy or utility companies that were buying mega risk covers. But now a known energy company is understood to have opted for the mega risk policy bringing down its premium bill of Rs.21 crore by nearly 25%. Mega Risk policies are cheap under present market conditions but if there is an upheaval in the reinsurance markets the domestic rates could end up being cheaper. Private companies are going after creamy business, raining the issue of state-owned companies being compelled to underwrite non-profitable business because of their dominant position. Most private companies have made very little headway in the personal lines of business except for new automobiles.
New India Assurance Company, the largest non-life insurance company in India, has reported a 130% rise in net profit of Rs.590 crore for the year ended March 2004 compared with Rs.256 crore in the previous year. The rise has been due to an improvement in claim ratio and a big jump in investment income, which rose 64% to the last years.
On the other hand, the ‘National’ has registered a 47% decline in net profit despite the highest premium accretion and growth in the general insurance industry during 2003-04. Their tie-up with Maruti and more recently Hero Honda are expected to fetch around Rs.800 crore. As part of measures to streamline their motor accident claims, NIC has provided an increased outstanding liability. They are working out a de-risking model to minimize its exposure to the motor insurance business. The new line of thinking is to tap the profitable personal lines of business.
Higher third party claim ratio :
Third-party claims in motor insurance have hit all the non-life insurance companies hard with some companies having to shell out as high as 30% of the motor insurance premium collected. Some state-owned companies have asked to make it mandatory for a vehicle owner to buy one-time third-party insurance for 15 years.
The suggestion follows a finding that 40% of vehicles in India were uninsured as reflected by the gap between the number of motor policies and the vehicle population. The motor insurance is the fastest-growing segment, with premium income rising by 20% there is pressure on the profitability on account of third party claims. The one-time tax has been introduced successfully for motor vehicles. A 15-year cover can be provided at affordable rates say 10% of the cost of the motor vehicle. Insurance companies payout in the third party claims nearly three times what they receive by way of premium income.
The main fear of TAC on pricing is that freeing rates would create a population of vehicle owners, who nobody is willing to insure. If the law is strictly enforced and every vehicle owner is forced to buy a policy, the claim ratio of insurers will improve even with the present rates.
Customer intelligence solutions :
In India, in the non-life sector, the concerns on profitability were higher because of imminent de-tariffing that could lead to a rate-war as companies scramble to build market share. Insurance companies are data rich but information poor. In India, health and motor businesses are the fastest growing. But these are also the segments with the highest losses with claims ratios inching towards the 100% and 300% mark.
Part of the reason for the high claims is the high level of soft frauds & inflated bills. Non-life insurers, plagued with high losses under motor and health insurance can improve their claims ratio by utilizing information technology. In developed markets, customer intelligence solutions have helped insurers in predicting claims, detecting frauds and frightening up their underwriting practices. The solution works on the 80:20 principle which means that 80 of the solution is based on a pre-built set of models that are used internationally while there is a 20% adaptation for the local market.
Claim repudiation and litigations :
The liberalization of the insurance sector has been a success in India. Insurance penetration i.e. the percentage of premium income to the gross domestic product has moved up to 3.26%. The improvement has been largely on account of the growth in the life insurance business.
The growth in the insurance industry has been more rapid than the overall growth in the economy. While the improvement in insurance penetration is significant, it is still nowhere near the world average of 8.14%. But the world average has been pushed up due to developed countries where higher disposable income leads to the higher purchase of insurance. In developing countries, the relevance of insurance to the economy is typically lower because, for a large section of the population, there is hardly any disposable income with expenditure concentrated on fulfilling basic needs.
In India dealing with rate, customers are quite bothered especially if the product is motor insurance. The majority of claims are repudiated on account of misrepresentation whether intentional or not. Since insurance is a business based on good faith, policyholders are expected to submit true information. At the time of assessing the claim, these misrepresentations come to light and hence the claim is rejected completely or partially. All this triggers off a dispute or litigation to be redressed by the arbitration, consumer forums or courts.
TAC acquiring new skills :
The Tariff Advisory Committee was constituted to issue administered rates on businesses in the non-life sector. At present over two-thirds of non-life business is governed by tariff rates. The businesses where rates are fixed include motor and fire insurance. Marine and engineering businesses are non-tariff where rates are decided by the operating office.
IRDA had indicated that the entire non-life business would be de-tariffed and left to market forces in the next two years. Lack of data and demands from some stakeholders who would like to present a tariff system to continue are keeping third party liability from being de-tariffed. The absence of data was one of the key reasons that kept motor insurance premiums from being completely de-tariffed. Besides some stakeholders want the present system to continue.
The volume of bogus claims is a major problem but not including TPA in de-tariffing would not help the industry. TAC which controls almost 70% of the tariff driven business of non-life insurance companies, is diversifying its role. To begin with, TAC has just agreed with the World Bank to help it acquire new skills in a de-tariff regime. The World Bank team is expected to prepare a detailed action plan after they evaluate the present structure.
They will help us in understanding rate-setting skills in a de-tariff setup. TAC has also set the groundwork for doing onsite inspections along with the IRDA for companies which are exempt from insurance provisions. However, rate setting skills are to be understood and evaluated in a free enterprise model, where all companies are free to prepare their tariff. De-tariffing moto insurance will carry the message that the IRDA wanted competition and Fairplay to benefit the largest section of the people.
By Mr. Jagendra Kumar, Jaipur, Published in The Insurance Times, February 2005
