Professional Documents
Culture Documents
Shashwat Tandon
[shashwattandon@hotmail.com]
Organised by
National Insurance Academy School of Management, Pune
on February 9 – 10, 2006
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DETARIFFING
Shashwat Tandon
EXECUTIVE SUMMARY
The main focus of this research paper is to study the effects of Detariffing on insurance
companies. The paper gives an overview of the various issues which a insurance
company will come across in a post Detariffing scenario. The paper highlights the major
issues which could be raised in a post Detariffing scenario like how market and prices
will move, how products will shape up over a period of time, what are the chances of
mergers and acquisitions, how the role of regulator will be modified, what will be the
changes in the internal governance specially in the underwriting of the policies and risk
rating .
Finally Detariffing will be a smooth transition from tariff to non-tariff regime or not?
INTRODUCTION:
The Indian insurance industry is at cross roads. Booming economy, free flow of capital,
general euphoria regarding the success stories of the Indian companies globally have all
created a virtuous cycle where the country is looking at future more optimistically. This
optimism, translated into business and commercial initiatives will create more wealth to
the country. Insurance being directly connected with wealth is also likely to leapfrog
many times over. Even conservative estimates states that the potential premium is in the
region of about Rs 40,000 crores in the general insurance sector alone. The IRDA has put
non-life insurers on notice that the present tariff rating regime in fire, engineering and
motor businesses, constituting about 70% of the Rs 20,000 crore market , will be
• Highly regulated market conceptually makes it safer for the Insurance Cos. as
well as for the insuring public.
• However, in view of the uniformity in the rates and the product itself, customer is
not able to dominate the market forces.
In India, with 45% of its share and growing every day, motor Insurance Industry has
certainly matured enough and hence time is now overdue that it should come out of this
parental protected cocoon and grow exponentially with the fast growing Industry.
But when the IRDA detariffed marine hull this April, insurance premium rates in this
segment fell by as much as 50-60 per cent .The underwriting losses on motor claims
ranges between 100% for some companies and 130% for some others. The industry has
been clamoring for detariffing the motor insurance for long, but the powerful truck lobby
has been blocking the move. The IRDA is preparing general insurers on detariffing of
motor insurance which is to be implemented in the year 2006. The industry had been
demanding de-tariffing of the motor insurance since they felt that their products were
under priced. The IRDA has no intention to deregulating the third party premium because
of its statutory nature. But Detariffing of motor insurance has to be done for both owners’
damage and the third-party liability. It cannot be done in isolation. According to Bombay
Chambers of Commerce detariffing the own damage portion only could exacerbate the
problems faced by the insurer. According to them, the solution laid in detariffing the
entire class of motor business. Third party liability insurance business is a loss making
business. With over 3.5 lakh accidents resulting in over 85000 fatalities, the accident to
vehicle ratio in India is the highest in the world at 31.8 per cent. As third party was
deteriorating rapidly due to abysmally low tariff premium and increasing cost of claims a
committee headed by justice Rangarajan, constituted which decided to approach in the
following manner:
It can be forecasted that the chain effect will force the underwriters to structure the Risk
Management process to see that the profit margins are maintained by ensuring that their
profits are not eaten away by the external forces as is happening presently. Hence it is
expected that the Insurance Cos. as well as their customers will derive the full benefit. Be
it as it may, in the Free Market scenario, only those underwriters will emerge winners
who will devise specialized scientific control methods and ensure their enforcement as
corporate governance to eliminate the tremendous leakage which is currently taking
place. The cos. who are not profit conscious, will be seen fighting for their survival. As
in long run only few players will be there in market as market reaches its maturity.
As the role of regulator changes to a more restricted one, at the company level corporate
governance becomes the most important component determining that the insurer has the
necessary strategy and the top management will to ensure a smooth shift to a non-tariff
regime.
Corporate governance standards set by the Board will include all aspects of internal
control systems that will ensure proper discipline in underwriting and set directions on
issues such as:
• separation of critical functions
• comprehensive risk management policy
• methodology of provisioning
• policies and procedures regarding accounting matters
• setting up independent risk management functions relating to the type of
business underwritten.
• policies regarding conflict of interest
• fair treatment to clients
• inspection of risks and risk analysis
• IT policy, data collection and analysis
• rating procedures in consultation with the Actuary
• New product development and approval etc.
Every report of the CEO to the board of director on the business development
must also comment on the emerging claim experience of the business and
adequacy of the current underwriting and rating levels, such reporting should be
done atleast once every half year .Each insurer should have compliance officer
who will ensure that system function as it is expected to. In case of Detariffing
moving from rule based underwriting systems and practices to a risk based
decision making of the subject matter offered for underwriting by the customers.
Risk Factor Rating System (RFRS), where by vehicles are grouped on a scale of 1 to 20
with group 1 being the lowest rated vehicles and group 20 being the highest. Under RFRS
the premium rate is calculated on the actual claims experience of the insurer or the
industry. It is a statistically based rating system where each policy holder pays a premium
rate that is based on relevant risk factors .The advantages of RFRS is that it can provide a
more statistically based pricing as compared to sum insured based rating system in the
Indian market .
Presently, PML helps us in quickly knowing - whether the risk is good or bad.
Also High PML = Bad Risk and vice versa and so on...
Further, from Reinsurance point of view; a similar simple thumb-rule can be: -
Deregulation fallout
From 1990-2002, there were 2,595 M&As involving European insurers, of which 1,669
resulted in a change in control.
In Japan, intense price competition reduced premium per risk, hitting both revenue and
underwriting profit in non-life sector.
According to an industry source, once the rates are freed, all eyes will be on industry
leader New India Assurance Company. "It is the leader who decides the rates and others
just follow, perhaps, with slight variations." It will be a catch 22 situation for the
government insurers as they will see premium going down while being laden with the
loss making motor portfolio where the rates are inelastic. Private insurers refuse accept
commercial vehicles. Curiously IRDA remains silent to this practice .Detariffing is
essentially an acknowledgement of business realities and an attempt to differentiate the
risk exposure. Keeping one sector of insurance which comprises over 40 per cent of the
market under tariff fundamentally goes against the concept of detariffing. Obviously, the
IRDA is concerned with the possibility that detariffing may result in non availability of
• Detariffing of own damage insurance would increase the own damage rates which a
truck owner would not be able to afford.
• The harassment of policy holder would increase further after detariffing as there can
be instances of loading of premium even on brand new vehicles
• As feared by road transport industry de-tariffing could lead to an increase in motor
insurance premium and thus an increase in their working costs. In such a situation,
they fear that the increased costs might have to be passed on to the consumers, which
could make road transport costlier than rail freight movement.
• Insurance agents /surveyors/ brokers/TPA’s/investigators and other related
intermediaries at times may mislead customers.
• Members of the same pool/group/ risk category with standard coverage will be treated
differently by different insurers.
• In case there is detariffing there will be a blood bath. 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.
• Some members felt that detariffing of the motor business would result in a reduction
in insurance premium making the business further unviable. They point out that as
marine insurance business was detariffed, premium rates had crashed and at present
much of the business is offered at a very low price.
CONCLUSION:
Complete detariffing will not only transform the industry from a regulated to a
competitive environment, it will enable better allocation of resources, resulting in wealth
creation for the individual, the community and the country. Consumers will get an
opportunity to select a good product at a competitive price and will have a choice from a
wide range of customised products. Detariffing is also expected to bring substantial
• IRDA JOURNALS
- JUNE 2003
- JULY 2004
- FEBURARY 2005
- SEPTEMBER 2005
- MR.G.V.RAO
- MR.SWARAJ KRISHNAN
- MRS.UTTARA VAID
- MR.B.G.PATKI
- MR.N.RAVEENDRAN
- MR.ABHAY GUJAR
- MR.SATISH RAJU
- MR.DHANANJE DATE
- MR.GOVIND JHORI
- MR.DINYAR M JIVAASHA
- MR.S.V.MONY
WEBSITES REFERRED:
• www.timesofindia.com
• www.ft.com
• www.businessweek.com
• www.asiainsurancereview.com
• www.businessinsurance.com
• www.insuranceage.com
• www.postmagzine.co.uk
• www.riskreport.com
• www.economicstimes.com
Author’s profile:
Shashwat Tandon did BA(Hons) in ECONOMICS from Hindu College
,DELHI UNIVERSITY .He is currently pursing M.B.A from National
Insurance Academy, Pune.