From January 1, 2009, general insurers will have complete freedom in the wording and design of products. For now the regulator has allowed freedom regarding deductibles.

Come January 1, 2009 and general insurance companies will have a lot more to offer you than just a plan-vanilla insurance plan. The Insurance Regulatory and Development Authority (IRDA), which had embarked upon deregulation of the general insurance industry from January 2007, is gradually giving more teeth to the companies to decide the future course of the industry. On November 6, 2008, the regulator further relaxed the regulations and gave companies the freedom to file variations in deductibles for fire, engineering, IAR (industrial all-risk), and motor OD tariffs, subject to written disclosures. Moreover, the companies have got the freedom to file add-on covers in all these four areas.

What has happened so far
Keeping the interest of consumers and the industry in mind, the IRDA decided to deregulate the general insurance industry in a phased manner.

January 2007. Until January 1, 2007, general insurance companies had to comply with very stringent rules. There was no freedom in terms of wording of policies or deciding prices. On January 1, 2007, IRDA took the first step towards freeing up pricing. It allowed companies some freedom to price their products within a defined band. This was for one year.

January 2008. Finally, in 2008, the regulator freed up pricing completely. The race for more business and intense competition in the market led to a drop in premium rates by as much as 60-70 per cent in case of fire and engineering insurance.

What remains to be done. While pricing has been completely freed, no substantial improvement has happened in the wording space. Once this happens companies will be able to structure their own wording and offer more choices to customers in terms of policies. For now, IRDA has taken the first step in this direction and has allowed insurers to charge or change deductibles from January 1, 2009. Deductible is the percentage or amount that is borne by the insured in case of a claim. Apart from this, the regulator has also allowed insurers to provide add-on covers with the policy.

How will this affect you
Although the changes pronounced by the insurance regulator will have a significant impact on tariff covers for fire, engineering, IAR and motor insurance (OD), retail customers should watch out for the motor and fire insurance. Insurers can give additional covers which were not allowed till now.

Higher deductibles. All insurance policies carry some sort of deductibles. For instance, in fire insurance, the deductible is Rs 10,000. But for motor insurance, the deductibles are abysmally low. Insurers will now be able to charge higher deductibles and lower premiums from customers, if required. For the retail investors it might mean shelling out more. ?The prices prevailing in the markets today are not sustainable. Premium rates have to go up. And now with the new regulatory change, even deductibles will go up. So all in all, the retail investor will have to pay more for motor insurance. We might see higher deductibles as the next emerging trend in the general insurance industry and we can expect significant changes in the policies,? says Darvesh Panchal, vice president, Prudent Insurance Brokers.

The move will also create variety in policies. ?Insurers will now have various stages of deductibles, which they will target against various classes of business and clients. In case of fire insurance, for houses, certainly Rs 10,000 is enough. But for larger establishments, insurers might raise the deductibles and lower the premium,? says Rahul Aggarwal, chief executive officer, Optima Brokers.

Waiver of depreciation. This is one area that will benefit the retail customer, but at an extra cost. In case of motor insurance, for each and every claim that happens, the insurance company does not pay the depreciation on the parts. So any part that is changed, the depreciation on that part is borne by the customer. This means the insurance company will not pay for the new part in full and deduct some money for the usage of the part that is to be replaced. Currently, there is no depreciation on glass; for metal, the depreciation is in the range of 5-15 per cent. Imagine that your ten-day old car meets with an accident and needs replacement of some part. The insurance company will compute the depreciation value and then pay for the new part. Until now, Bajaj Allianz was the only company that charged a higher premium and offered the benefit of waiver of depreciation for the first year. But with this change coming in, this might become the norm.

?This cover will be of great use to people who want a comprehensive policy for their small or old cars. In case of old cars the depreciation keeps increasing. So this kind of cover will help them a great deal,? says Aggarwal.

Loss of use. In case your vehicle is severely damaged and needs to be kept in the garage for three days, your insurance company will now be able to either offer you a replacement car or pay you some allowance for daily commuting.

Says M. Ramadoss, chairman and managing director, Oriental General Insurance Company: ?More varieties will come in. Today tailormade policies are being sold to individual customers. We could come out with varieties like providing a replacement car, introducing policies without applying depreciation in case of claims by charging an adequate premium.?

While these are a few changes that will usher in a variety of covers in the insurance industry, more will come in gradually when the industry is given full freedom with respect to wordings and designing its own products.