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Open Vistas - Article on Detariffing of General Insurance by Antony Jacob, Managing Director

The Economic Times, 08 November, 2006


The past 6 years have seen a transformational change in the General Insurance industry in India. Since the first private companies were licensed in 2000, the insurance market premium has grown at the rate of 15% per annum and will have doubled in size by the end of this year.

The opening up of the Insurance industry was carried out with the objective of helping the economy meet its growing insurance needs and to promote India as a regional reinsurance hub. In this country of over one billion people, the untapped potential for insurance is enormous. The entry of a large number of Indian and foreign private companies in non-life insurance business has led to greater choice in terms of products and services. Increased consumer awareness of the benefits and importance of insurance and reinsurance has generated many more buyers. Private General Insurance players have grown rapidly to capture a third of the market and helped in pushing the industry growth rate.

As the Indian Insurance Industry readies for the free market environment, its focus on providing value-added features, good quality service will also increase considerably, including risk management. More players and specialist mono-lines companies will emerge and the market will become more sophisticated and will attract global competition and global capital.

In global insurance markets, the abolishment of tariffs has resulted in 5 major benefits to consumers and companies.

1. Greater price competition, based on actual risk characteristics and claims experience.
2. Greater focus on product features and the delivery of world-class service.
3. Greater awareness of the need for independent advice in risk management and risk services.
4. Greater access to insurance purchase and renewal through brokers, call centres and the internet.
5. Greater Regulatory oversight, control and involvement in the UK, the Financial Services Authority (FSA) employees over 2600 people.

Similarly in India, both, consumers and Insurance companies will benefit from the abolishment of tariffs. We expect two prominent trends in the Tariff-free market. There will be increased participation from customers in rating a risk. As in the developed markets, information provided by the customer will play a key role in deciding the pricing. In the case of Motor insurance, a combination of a host of factors including the make, model, location, driver''s age and experience, security features of the car and usage will have a bearing on the final premium payable by the customer.

Another major development will be in ''Product Differentiation''. Insurers will be able to provide products packaged to meet unique requirements and price them depending on customer profile and product features.

Taking an example from the UK market, which is one of the most sophisticated insurance markets in the world, the free-pricing regime has led to the introduction of additional rating factors for motor insurance customers. One of the factors being that the premium will vary depending on the amount of mileage / time one spends on the road, linking the premium that a consumer will pay directly to the amount of exposure that an insurance company carries. Another new concept that is being promoted is that `younger drivers pay less premium if they don't drive at night`. Such offers encourage certain type of drivers to drive in less riskier periods, and the consumer is also benefited by lower premium being offered by the Insurance company.

The abolition of the tariff will increase the sophistication and globalisation of insurance market in India. This has benefits for Insurance Companies, Brokers, Regulators, and most importantly the Consumer and the Corporates. It is an exciting challenge that all professional Insurers are looking forward to.
 

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