The primacy of purpose of detariffication was to encourage price competition among insurers to encourage new product development, to coerce them to reduce transactional costs, to make them want to improve the efficiency of their business processes and to generally put customers in the driving seat. Above all, it was meant to eliminate the prevalent cross-subsidisation of rating structures that tariff products have encouraged in the transaction of non-tariff products.
The Irda angle:
Insurers, due to the prevalence of tariffs, had neglected to learn the science of risk management and loss prevention that is at the core of the transaction of non-life insurance business. Collection and analysis of data, segmenting business risks in each portfolio and checking out the frequency of their claim occurrence and the av. severity of claim occurrence to underwrite risks, based on past trends and future expectations, had never become a part of the mindset of the most experienced underwriters. As such risk-adequate prices was a novel concept to the entire market. Underwriting that meant one did have a choice of either raising the deductible or raising the price is not practiced in the current market.
Natural perils like floods were underwritten treating the whole of India as one risk zone, as the rate was tagged on to the fire and allied peril rate. Deatriffication must, therefore, be seen as an opportunity the Irda has provided for the industry to learn and build up its risk management and corporate governance expertise.
What may queer the pitch of detariffication goals
The entry of more insurance players, at a time when the market has to yet to adjust to unhealthy competitive pressures, would add to the rating woes of the current insurers. The creation of more insurance capacity is a sure recipe for market rates to remain unstable for a longer period. What are the exclusive corporate business strategies they have highlighted before the IRDA for gaining business volumes What is the specialist expertise they would bring to the market to justify their presence and survival What is their USP
As far as future rating criteria is concerned, in view of the lack of market data on current businesses including the individual company-wide data in detail on the part of PSU insurers (TAC did not collect any data for decades), competition will continue to be a pursuit of blind leading the other blind for a few more years.
There are two mutually exclusive business models in operation in the market: one, a highly decentralized set up, as in the PSU sector; and the other a highly centralised one, as in the case of the new players. A third model of mix has yet to come in to play, which may happen, as the new players begin to experience the problems of growth and increased consumer dissatisfaction.
Five out of the eight private players have business costs on EP in excess of 42% going up to 50% and that is a big majority. The other three are above 30% cost but below 35%. All the eight players, with the exception of Bajaj, have combined ratios in excess of 102%. with Reliance at 113%. Detariffing would pose them more challenges to manage the combined ratios.
Their gross written premium (GWP) of the eight players in 2006/7 was Rs 8,720 crore and they earned RI commissions of Rs. 1,036 crore (11.8% on GWP). Their commission outgo was Rs. 620 crore (7% on GWP). In effect their RI net earnings were Rs 416 crore. Their ME was Rs 1,710 crore. If the RI commissions should get reduced either due to lowered GWP or due to the offer of lower RI commissions, this would impact on their net RI earnings. The other costs on distribution and ME are likely to go up than down with the loss ratios likely to go up.
The problems, in particular, would become more acute for four players that have lower GWP, three whom have cost ratio of more than 46% on EP. How would they manage their costs to keep their Combined ratios less than 100% That is a big question.
The growth in the market is coming only from the motor and health sectors, both of which have shown in the past that insurers have no clue on how to profitably manage them The total dependence on motor dealers for business has encouraged providing of kickbacks and also the facility of claim settlement, outsourced to them, as a part of the total package. Health insurance is mostly written than underwritten and is outsourced to hospitals and TPAs.
Motor Commercial third party (TP) currently quarantined to the Pool would present separate problems altogether of improper-provisioning of claims, problems of reconciliation of balances and cash flow issues in the next year by the time account closures near. It is doubtful if the company accounts would be closed, except based on unverified estimates of premiums and claims.
A market that has been consistently making operating losses for over 15 years would only produce worse results than in the past. While the PSU insurers have their investment incomes to cushion them, the new players are the ones with more challenges to face in the detariffed scenario. With new players added, the trial and error methods of underwriting would multiply.
Two international reinsurers, Swiss Re and Munich Re are on record that they would write Non-proportional and fac covers from India. They are, of course, interested in writing X/L covers for natural perils.
With GIC, having had reduced obligatory cessions, is hungry for more inward business. With their expertise in optimising investment incomes, they seem to be eager to support the Indian market for the present. How long would this last
How would this initiative play out With the IRDA, not having ensured by physical check that the risk management systems, data collection mechanisms and corporate governance norms, it had advocated are really in place, it has taken an unexpected plunge by announcing that the tariff rates could be reduced by as much as over 50%.
Insurers are now required to learn by real-life experiences than by quality management of risks and through underwriting discipline. The industry is divided among each player and with the entry of more of them; it is the divisions that would be seen at the market than a unity for sensible, risk adequate prices.
The Reinsurers angle:
The Irda, having regulated that no single reinsurer should have more than 10% of the placement of the treaty, without its prior approval, has effectively fragmented reinsurance placements.
The reinsurance brokers having gained an ascendancy in placement have done their worst in further fragmenting these shares to oblige their pet reinsurers in Africa and elsewhere, with small shares of 0.5% etc. The interest of reinsurers currently is just polite, waiting for developments.
The author is a former chairman of Oriental Insurance