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On
September 23, 2005, the Insurance Regulatory Development
Authority of India (IRDA) announced that non life-insurance
companies would be brought under a tariff-free regime with
effect from January 1, 2007.
After detariffing, these companies would be allowed to fix the
premiums for the insurance products they offered based on their
own analysis and perception of the risk involved in each case,
without governmental regulation.
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In other words, detariffing would increase the role and responsibility of the
underwriter, and cause a shift from rule-based underwriting to risk-based
decision-making.
Commenting on the move to set up a tariff-free regime in general insurance, the
Chairman of the IRDA, C.S. Rao, said "The proposed detariffing in general
insurance industry would lead to a major shift in the focus of insurance
companies from corporate business to individuals, resulting in higher insurance
penetration in the country." 1
J. Cyril, President of the Oriental Insurance Company officers' Association and
former Secretary-General of the Confederation of Insurance officers'
Associations, said, "All along, the private sector in the industry had greater
flexibility in quoting premiums because of certain practices like commissions
and incentives. Detariffing will enable the public sector companies to quote
competitive rates." 2
According to analysts, the impact of detariffing would vary from segment to
segment in the insurance sector. The engineering and fire insurance premiums,
which were a lucrative business for the insurance companies, were expected to
fall, whereas premiums in the loss-making motor insurance segment were expected
to increase after a detariffed regime was set up.
Marine hull/cargo insurance premiums were also expected to fall, because
profitable risks covered by the companies would be offered at a competitively
lower price. The health insurance companies were expected to experience profits
as cross subsidization3 would be
eliminated.
Until 2006, health insurance products accounted for less than 1% of the business
of life insurance firms, in terms of premium value.4
Life insurance providers were allowed to offer a limited range of critical care
products along with their life insurance policies.
However, premiums from standalone health care insurance products sold by general
insurance companies contributed to almost 11-12% of the total premium value pool5.
At a stage where the health insurance companies lacked transparency and
regulation of services, the detariffing policy was expected to play a
significant role in remedying this situation.
Also, this sector was expected to expand its services by providing customized
policies to customers based on their individual risk profiles.
1] "Detariffing transition in non-life segment
to be smooth," www.thehindubusinessline.com, March 26, 2006.
2] "Detariffing in general insurance notified,"
www.thehindubusinessline.com, December 7, 2006.
3] Cross subsidization is where one group pays a
relatively high price and thus enables another group to pay a relatively lower
price.
4] Regulators "free pricing" plan brings new
dimension to Indian health insurance industry www.globalinsight.com/SDA.
(accessed on January 5, 2007)
5] Regulators "free pricing" plan brings new
dimension to Indian health insurance industry www.globalinsight.com/SDA.
(accessed on January 5, 2007)
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