It's time the Indian insurance industry got a face-lift. And the government sure is initiating steps in this direction. The first of which is detariffing. Come January 1, 2007, insurance companies will come under a detariffing regime.
In response to demands from the industry to end the tariff regime, the IRDA outlined in September 2005 a timetable to discontinue all tariffs with effect from January 1, 2007.
With the abolition of tariffs, the Tariff Advisory Committee (TAC), will function as a recommendatory body for tariffs. Its recommendations will not be binding but are expected to function as a floor.
Fixed tariffs apply to fire, aviation, engineering, motor, marine cargo and workers compensation - the lines that make up the bulk of the business.
The non-tariff lines of business that the TAC allows in the non-life sector include liability insurance, indemnity insurance, personal lines like health insurance, and marine hull insurance, the last being freed of tariffs only since April 2005.
Detariffing is aimed at making prices in the insurance industry market driven. While this is a welcome move, could price wars plague the insurance industry now?
Speaking exclusively to moneycontrol, Dalip Verma, MD & CEO at TATA AIG General Insurance said, "If a price war were to begin, we need to make sure we don't totally get embroiled in it, and dilapidate our finances. A company cannot tell their customer that - I gave you 30 per cent off on the premium and now that you have a claim please wait for 30 per cent longer time, he is not going to accept that."
He added that a price war kind of situation will be avoided since the IRDA is putting its requirements, where it won't allow a company to reduce its prices beyond a point. "Even if an insurance company is reducing prices, IRDA will demand the statistical basis of reducing prices."
At this point the insurance industry has very little time to grapple with these huge changes. What would ideally take a few years to implement, is being put into action in a few months, say insurers.
Once changes like detariffing come into play, one challenge would also be to train intermediaies. "Training intermediaries and your entire distribution force, on the new paradigm will be a challenge. Today under the tariff, people just look at a chart and tell you the price of your car insurance. But after detarrifing, every company will have its own method of calculation, and you have to make sure that your staff, the customer and everyone understands that," said Verma.
Customer awareness regarding all these changes is also essential, Verma says, "There are measures that the IRDA along with the General Insurance Council will take. They will come out with a media campaign in the next few months to explain to the public what detariffing means."
These are not the only challenges that this burgeoning industry is facing. Insurance companies need to concentrate on product development and brand building, which many insurance companies have now become active towards.
They need to also contain the talent resource, thereby providing good incentives to employees and retaining talent.
"Insurance has not been looked at as a preferred job in the past, but now it is pretty much in demand, thus companies need to devise ways to source and retain talent."
Verma says that in future insurance companies will also have to move towards value creation, and listing on the stock exchanges will be a step in this direction.