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Detariffing of motor insurance, both in the own damage (OD) and
the third party liability (TPL) parts of the coverage, was
expected to improve the financial viability of the auto
insurance market and enable scientific risk assessment and
rating of different groups of vehicles. The IRDA had set
guidelines to ensure that the premium for a vehicle depended
mainly on the make, model, engine capacity, claim experience,
and region of operation. This was for the benefit of vehicles
owners who had a low risk profile, owned vehicles with a lower
engine capacity, and did not have a bad driving history.
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The move was also expected to promote good driving practices.
Analysts opined that as the insurance penetration in India, in terms of
consumers and companies, was lower than in other countries, the market potential
for insurance cover at competitive prices was high. The detariffing was also
likely to infuse more capital into the private insurance companies, as the
market became more attractive, and after the Indian Parliament approved the
Finance Ministry's proposal to increase the foreign direct investment limit in
the insurance sector from 26 percent to 49 percent in early 2007. Detariffing
was expected to bring in several benefits. For insurance companies, detariffing
would lead to the adoption of better risk management practices. It would also
eliminate cross-subsidization of the insurance products offered by the
companies. Insurance agents could also begin to adopt niche brokeraging, by
customizing policies to the consumers' requirements.
For individual consumers, detariffing was expected to generate customer-friendly
options and encourage them to invest in multiple insurance products. It would
also offer customized policies at competitive premiums. It was also expected
that insurance companies would take care to ensure quality, efficiency, and
promptness in their services due to greater competition in the market. Analysts
expected that with the advent of the detariffed regime, the penetration of
insurance would increase in India. Considering that the penetration of insurance
was only 3.2% in India, detariffing was expected to prove beneficial in scaling
up the figures to global standards.6
Despite the many advantages of a tariff-free regime, some market sources have
opined that the insurance industry could face some hiccups in the initial stages
of detariffing. They said that premium anomalies, which might arise from
insurance companies' attempts to capture market share through their pricing
policies, could lead to price wars and lower premium inflow with no change in
the claim rate, and bring down the profits of insurance companies. This would in
turn affect the solvency ratios and the international ratings of the insurance
companies and also their reinsurance placements and underwriting capability.
Insurance companies were also likely to see an increase in expenses on training
their staff in their new products and pricing policies, which would put a
further financial burden on them. Employee retention costs and higher attrition
rates could also be a major concern for the insurance companies.
However, the IRDA had laid down safeguards and procedures to be followed by the
insurers on key elements like underwriting, rating support, policy terms,
corporate governance, and the role of Tariff Advisory Committee (TAC).7
It had also mandated that the insurance companies should not change the terms
and conditions of the products till March 31, 2008.8
This was expected to ensure that an unregulated regime did not turn into a
chaotic one.
6] K.C.Mishra, "Detariffing will push up insurers
costs," www.indianexpress.com, October 6, 2006.
7] TAC is a statutory body under the Insurance Act of
1938. TAC controls and regulates the rates, advantages, terms and conditions
that may be offered by insurers in respect of General Insurance Business
relating to Fire, Marine (Hull), Motor, Engg. And Workmen Compensation.
8] Falaknaaz Syed, "Free pricing blues for insurers,"
www.business-standard.com, January 2, 2007.
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