The Insurance Regulatory and Development Authority came out with a road map in September 2005, for de-tariffing the non-life insurance sector from January 1, 2007.
In an interview with C H Prashanth Reddy, Irda chairman C S Rao speaks about the need for detariffing, pitfalls to be avoided and the impact of detariffing on the insured. Excerpts:
What is the need for detariffing the non-life insurance sector?
There is a contradiction between free market and tariff. In a free market, rates are normally determined based on the risk conception of the insurer vis-à-vis the insured. For instance, if a particular building has not faced fire accidents for the past 10 years, then there is no reason why the premium should not be less for it, compared to a building, which is prone to accident.
Some of these things have been built into the tariff. However, there are still a number of aspects that are not incorporated. Hence, detariffing has to be done so that the rate reflects the risk element.
As of now, nearly 70 per cent of non-life insurance policies are covered by tariff and 30 per cent by free rating, thus allowing the insurance companies to decide on the rate.
Does this eventually mean that the insured will end up paying more?
The issue is not whether you end up paying more. If you are careless, you will obviously pay more. If you are careful, you pay less. Today, we put everybody in the same slot. That is not correct. I think somebody who is investing in safety measures should pay less than somebody who is not.
Insurance companies maintain that third-party motor vehicle insurance continues to be non-profitable. Don't you envisage a steep hike in the premium rates of these policies?
There will definitely be an increase. This increase is necessitated by the statistics that show that the claim ratio is always adverse. The insurance companies' ability to offset this loss by having good premiums in other areas is also not possible because competition will bring down the rates elsewhere.
To that extent, third-party insurance rates may go up and will be justified with reference to the claims ratio.
Will the situation be the same in the case of health insurances, which is also stated to be non-profitable?
What isn't profitable in health is group health insurance premiums. Today, if an insurer approaches a factory for insurance, the owner asks, " I am buying a fire policy, why don't you give a medical policy at a low rate?" Thus, there is an element of cross subsidisation.
This will disappear following detariffing. Prima facie, it may appear that insurers are charging more for group health policies after detariffing.
However, there will be a reduction for fire policy. So one will be offset by the other.
Are there any bottlenecks in detariffing?
Although I don't see bottlenecks, there may be pitfalls. One is the possibility of severe competition reducing premium rates below the economic level. This may lead to cut- throat competition, which might bring about the insolvency of some insurance companies.
That is a matter of concern. But I am sure that the Indian market is mature enough to ensure that competition will not lead to irresponsible underwriting.
Will detariffing unduly benefit large insurance companies that have deep pockets?
So far, the insurance companies operating in India have a capital base of over Rs 100 crore (Rs 1 billion). They are strong companies and will be able to compete with each other.
How many new companies are in the pipeline?
We have eight public sector general insurance companies. Besides, the Shriram Group has intimated us that it is interested in setting up a general insurance company.
Why does Irda want more regulatory powers?
It is not the regulator that wants more powers. The Insurance Act is under consideration for amendment. This Act is a 1938 legislation. Some of the clauses have become redundant and some have to be updated to meet the current reality.
Today, there are a number of details in the Act that can go to the regulator. It gives the impression that this amounts to giving more regulatory powers to the regulator. But that is not the case.
Instead of implementing the provisions of the Act, the regulator will be implementing the regulatory provisions. And the regulatory provisions can be changed to suit the changing requirements.
Will the guidelines for unit-linked insurance plans be implemented by this month-end?
June 30 is the last date for implementing the guidelines. Some companies have sought an extension of the deadline but we are convinced that most of them are equipped to implement the guidelines.
You wanted to set up a separate health insurance unit in Irda...
We have created a separate department. But in the Act, we are suggesting that we should have a definition for a health insurance company. We want to have health insurance as a separate entity and define it, because in the future, we will face more health-related issues coming to the fore.
What are the changes you would like in health insurance?
We are trying to persuade insurance companies not to bring in the concept of pre-existing diseases, provided a person has been insured for a long time. If an individual has been purchasing health insurance policies for four to five years and he has not claimed for any particular disease, then nothing should be admitted as pre-existence.
Otherwise, if somebody who suffers from blood pressure takes an insurance policy and 10 years later suffers a stroke, the insurance companies will not pay, stating that it is related to blood pressure.
This shouldn't happen. A large number of insurance companies have said that if there is no treatment or claim for four continuous years from the time the policy has been purchased, the clause of pre-existing disease won't be invoked.
We should have health insurance policies that are portable from one company to another and also encourage setting up stand-alone health insurance companies. As of now, there's just one stand-alone company, Star Health.
We expect more such companies to come up in the future. Irda has also suggested to the government that it should reduce the capital requirement for these companies.
What are the new areas of insurance that could be covered in the future?
Insurance companies are looking at newer markets and that's why we are going rural. These areas are considerably affluent and one doesn't have to look at the small products alone.
The second area is micro-insurance. There is a lot of scope for taking care of the weaker sections. The micro-insurance regulation we promulgated recently will facilitate the coverage of weaker sections at reasonable costs through NGOs and self-help groups.