What Does Detariffing Mean?

The act of removing the pricing regulations of an industry, set forth by tariffs created by a
regulatory body. Detariffing allows an industry to price its goods or services at market
value, as regulation is discontinued to promote market equilibrium. Investopedia explains
Detariffing
When an industry is tariffed, goods and services have fixated prices. Companies must file
forms with a regulatory body, such as the Federal Communications Commission, stating
its rates, terms and other conditions associated with its products and services, all of which
must conform to standards set forth by the regulator. Detariffing removes the obligation
to file these forms, and allows companies to choose what to charge for their goods.

Detariffing: Risks and Challenges

Published on Tue, Oct 10, 2006 at 11:02 | Updated at Mon, Oct 23, 2006 at 13:26 |
Source : Moneycontrol.com

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It's time the Indian insurance industry got a face lift. And the government sure is
initiating steps in this direction. The first of which is detariffing. Come January 1, 2007,
insurance companies will come under a detariffing regime.

In response to demands from the industry to end the tariff regime, the IRDA outlined in
September 2005 a timetable to discontinue all tariffs with effect from January 1, 2007.
With the abolition of tariffs, the TAC, Tariff Advisory Committee, will function as a
recommendatory body for tariffs. Its recommendations will not be binding but are
expected to function as a floor.

Fixed tariffs apply to fire, aviation, engineering, motor, marine cargo and workers
compensation - the lines that make up the bulk of the business. The non-tariff lines of
business that the TAC allows in the non-life sector include liability insurance, indemnity
insurance, personal lines like health insurance, and marine hull insurance, the last being
freed of tariffs only since April 2005.

Detariffing is aimed at making prices in the insurance industry market driven. While this
is a welcome move, could price wars plague the insurance industry now?
Speaking exclusively to moneycontrol, Dalip Verma, MD & CEO at TATA AIG General
Insurance said, “If a price war were to begin, we need to make sure we don’t totally get
embroiled in it, and dilapidate our finances. A company cannot tell their customer that- I
gave you 30% off on the premium and now that you have a claim please wait for 30%
longer time, he is not going to accept that.”

He added that a price war kind of situation will be avoi-ded since the IRDA is putting its
requirements, where it won’t allow a company to reduce its prices beyond a point. “Even
if an insurance company is reducing prices, IRDA will demand the statistical basis of
reducing prices.”

At this point the insurance industry has very little time to grapple with these huge
changes. What would ideally take a few years to implement, is being put into action in a
few months, say insurers.

Once changes like detariffing come into play, one challenge would also be to train
intermediaies. “Training intermediaries and your entire distribution force, on the new
paradigm will be a challenge. Today under the tariff, people just look at a chart and tell
you the price of your car insurance. But after detarrifing, every company will have its
own method of calculation, and you have to make sure that your staff, the customer and
everyone understands that,” said Verma.

Customer awareness regarding all these changes is also essential, Verma says, "There are
measures that the IRDA along with the General Insurance Council will take. They will
come out with a media campaign n the next few months to explain to the public what
detariffing means."

These are not the only challenges that this burgeoning industry is facing. Insurance
companies need to concentrate on product development and brand building, which many
insurance companies have now become active towards.

They need to also contain the talent resource, thereby providing good incentives to
employees and retaining talent. “Insurance has not been looked at as a preffered job in the
past, but now it is pretty much in demand, thus companies need to devise ways to source
and retain talent.”

Verma says that in future insurance companies will also have to move towards value
creation, and listing on the stock exchanges will be a step in this direction.

Is Detariffing of motor and fire beneficial for health insurance?

The year 2007 ushered in detariffing for motor and fire insurance. Detariffing implies that
the pricing of policies are left to the individual insurance companies to decide based on
scientific analysis of historical data and perceptions of risk. The change has engendered a
debate about the impact of the newly detariffed sector on the already detariffed sectors -
health insurance. We ask the experts…

'Detariffing will free health insurance from the web of cross-subsidisation'

Health insurance in India has two main divisions: individual and group. As motor and fire
insurance undergo changes, it is expected that the impact on individual health insurance
will be negligible. Policies will continue to be determined by the individual risk profiles,
but the growing awareness of the field will give it a different emphasis. Periodic health
checkups and suggestions for improvement will align with lower premiums for 'good'
risk. In other words, the incentive to actively impact their risk factors will have a positive
impact on custumer behaviour.

Group healthcare is a different story. Despite detariffing it long ago, thus having the
freedom to determine both the coverage and prices, group healthcare by itself has been a
loss-making portfolio. The general perception that its potential is overshadowed by the
lack of profit has rendered insurers soft on this sector. Unlike most countries in the west
(and in fact even individual health insurance in India), the group division is still not
determined on the governing factors (read: the health indicators), but rather treated as a
freebie that comes along with other insurance policies.
If we look at fire insurance — one of the profitable sectors — it is easy to understand
why most insurance companies have subsidised their group health premiums in order to
secure business. So, for several years, group health insurance has been caught in the web
of cross-subsidisation. Lured by the profitability of insuring companies against fire — as
there are fewer numbers of claims — group health insurance has become an attractive
'add-on'.

This trend will change. Prima facie, the knee-jerk reaction will likely be one of resistance
as group health premiums rise. But, in my view, this is the path to a more organised and
specialised sector. In any case, these price increases will be accompanied by price
reductions of fire policies on good risks, thereby offsetting each other.

Prices aside, this jump signals a major step forward for the health insurance sector. Cross-
subsidisation will become difficult, enabling health insurers to leverage their expertise
and better serve their function.

Ajit Narain

"Periodic health checkups and suggestions for

improvement will align with lower premiums for 'good' risk"

- Ajit Narain,
MD & CEO
IFFCO TOKIO General Insurance Co. Ltd, New Delhi
"Hospitals who will pro-actively help insurance companies manage better claim ratios
will become the preferred providers"

- Deepak Mendiratta, Managing Director, Health & Insurance Integrated, New Delhi
"Retail health insurance is a loss-making portfolio and after detariffing companies had to
cut down their losses"
- Dr Biswendu Bardhan
Branch Manager, Family Health Plan Limited, Ahmedabad

'Products focused on preventive health & OPD benefits will hit the market'

The tariff regime did not allow insurance companies to offer any discounts on the rates
prescribed by the government. Therefore, they offered unprecedented discounts on tariff
products like group health insurance covers. As a result of collecting low premiums on
group health insurance, this portfolio would always show losses when analysed on a
standalone basis.

Now, competition is expected to whittle down the fat margins that insurers enjoy in fire
and engineering insurance and eliminate cross-subsidies for health insurance. In
detariffing, the rating will be based on the risk profile of the customer and it will be in the
customers' interest to make his risk profile better. A risk will be judged on its own merits
and detariffing will force insurers to scale up their risk-assessment capability.

Now insurers are going to focus on making health insurance a profitable portfolio for
themselves. This will impact two areas. One to whom and at what terms should the health
insurance be offered, and, two, how to minimise claims arising at the hospital level.
While insurance companies will more prudent when it comes to providing health
insurance covers to individuals and companies, hospitals should brace themselves for
stringent claim control measures. These will include price banding procedures and
treatment costs and obtaining greater discounts from hospitals. Increased discounts from
hospitals may come from reducing the network provider list of insurers/TPAs and
channelising greater volume to select providers against a promise of higher discounts.
This will also mean that newer models will come into vogue like claims re-pricing, etc.
Hospitals who will pro-actively help insurance companies manage better claim ratios will
become the preferred providers. Also new products will come into the market which will
focus on keeping the insured healthy with emphasis on preventive health and OPD
benefits.

Deepak Mendiratta

'Companies will have to focus more on overall cost management'

Post detariffing, group health insurance will no longer be subject to cross-subsidisation

and will find its own price level based on standard underwritten norms. It means
corporates will pay higher premiums than individuals.

As far as retail health insurance is concerned, earlier insurance companies had the
flexibility to define the coverage and premiums according to the performance of the
portfolio. Retail health insurance is a loss-making portfolio and after detariffing
companies had to cut down their losses. In view of this fact, private and public insurance
companies are unveiling newer policies with more capping and restrictions based on the
total of the sum insured. Moreover, there are chances of differential loading in the
premium at the time of renewal of policies by the insured based on their previous year
claims. There are also possibilities of canceling some policies for erratic claims. There
could be a trend to provide policies with higher sum insured to increase the premium
based income. TPAs/ agents will have to play a major role in controlling the claims ratio.
Everyone would be in search of a magical stick to control claims.

Companies will have to focus more on overall cost management with emphasis on
prudent underwriting, operational and distribution efficiencies, leveraging economies of
scale, excellent service, building brand image, underwriting innovative products/policies
and cost-optimisation, to survive in a cut-throat competition and lessen price sensitivity.
There is also a need for a collaborative partnership between insurers, TPAs, healthcare
service providers, agents and brokers, the Government and community-based
organisations and the IRDA for the growth of the sector.
Dr Biswendu Bardhan

Abstract
Credibility theory is the term used by casualty actuaries to encompass procedures for
weighting and combining data from different sources into parameter estimates upon
which insurance rates are based. Criticism has been leveled at these procedures,
frequently as a result of a lack of understanding of the principles underlying their use.
This article explains the theory of credibility procedures by developing the concept from
such basic theorems of probability as Chebyshev's Theorem, the Central Limit Theorem,
and the Law of Large Numbers.