While IRDA’s motive in trying to stop the insurance industry’s self-inflicted spiral of descent to the depths cannot be faulted, could some remedial measures have been taken by the industry itself? Perhaps yes.
By making burning cost or the industry wide loss, the starting point for the pricing of general insurance risks of various kinds such as fire, property and group health, IRDA has effectively ended the era of free tariffing that had prevailed in the insurance industry since the beginning of 2007. Perhaps this was inevitable. For the last 8 years the whole industry appeared to be in one of those dance marathons where the music never stops.
IRDA had abolished fixed tariffs, and insurers - many of them new entrants with foreign partners - began to compete with each other so fiercely that corporate customers were getting their risks priced at an average of 85 % discount to the old tariffs, turning a blind eye to the principles of underwriting for market share gain. These risks were further farmed to reinsurers with seemingly infinite capacity and even when claims began to far outweigh the premiums collected and industry losses mounted, everybody just kept dancing.
Well, the music has just stopped and only one partner in each dancing duo of insurer and insured is going to leave the party smiling. Prudent Insurance Brokers has calculated the difference between the published burning cost (which will be the starting point for all policy premiums from January 2015 onwards) and the prevailing discounted policy premiums of fire insurance for nearly 90 lines of business from dwellings to factories, hospitals to software parks and cold storages to storage tanks, and the results are jaw dropping. Assuming that all industry customers are currently enjoying a very conservative discount rate of 80% on the old fixed All India Fire Tariff, the lowest increase in fire insurance costs could be for shops dealing in hazardous goods (99%). Those unfortunate enough to be in the sea food or meat processing industry could see their fire insurance costs increase by a whopping 1454%! These are the two extremes - on the average most businesses could see their insurance costs increase by 200% to 300%. Things are quiet now as most corporate clients are oblivious of the heartburn to come but the beginning of 2015 is certainly not going to resound with joyous New Year greetings between insurers and the insured.
While IRDA’s motive in trying to stop the insurance industry’s self-inflicted spiral of descent to the depths cannot be faulted, could some remedial measures have been taken by the industry itself? Perhaps yes.
Insurers have underwriting guidelines that we now know are observed mainly in the breach and they are also supposed to file minimum rates with the regulator, below which they are not supposed to venture, but they do. Did the boards of Insurance companies exercise adequate oversight about how risk was being priced compared to the company’s own guidelines and filings? Moreover, the regulator could have had a stricter regime of monitoring and penalising insurers for poor underwriting and unsustainable pricing of risk.
Detariffing was supposed to result in “risk based pricing” but these principals were abandoned in the scramble for market share. Maybe this regulatory move will make it easy for insurers to unitedly charge a reasonable premium from their clients. With higher premiums, losses will eventually decline and life will be better off for insurers and intermediaries alike. But questions remain:
a. With burning cost as the start point, will the industry make any move towards actual “risk based pricing” with different rates for good and bad risks?
b. Or will the industry burning cost end up as the default tariff for all customers, thereby limiting choice and forcing good risks to subsidise bad risks?
We will know the answers only after 1st January 2015, the deadline given by the IRDA to all insurance companies to implement these guidelines.
Gurpal Singh Dhingra is Director, Prudent Insurance Brokers
The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.