How about customised, sensibly priced cover for all vehicles?

The principal axis of Thomas Kuhn’s argument in the Structure of Scientific Revolutions (1962) reads like this: “Though the world does not change with a change in a paradigm, the scientist afterwards works in a different world.” I am often reminded of that thought when I look back on the changes in motor insurance arena in India.

Towards the beginning of 2007, the Insurance Regulatory and Development Authority (Irda) initiated phased de-tariffing in motor insurance by introducing a 20% flexibility in the own damage premium.

The motor segment contributes approximately 40% of the general insurance pie in India and is thus a vital cog of the entire industry. Previously, policy coverages and terms and conditions, along with premium rates for both own damage and third party liability used to be governed by a tariff structure.

The subsequent phases of de-tariffing included revisions of third party tariff premiums, creation of a commercial vehicle third party pool and freeing up of own damage premium rates in 2008, followed by Irda’s nod to general insurers to offer add-on products, along with motor insurance in 2009.

These developments have witnessed the transition of the industry from a standard premium for all customers where strong drivers made up for laggards to a risk-based pricing model with the underlying principle of charging the right premium for every class of risk.

This has led to removal of inefficiency in risk pricing methodologies and generation of a more customer-centric outlook for an effective distribution and service platform so that pricing remains attractive for customers.

The shift from a general levy on all vehicle insurance to a specific arrangement on certain vehicles further opens up a window of possibilities and innovation. Fundamentally, like Kuhn’s exposition, the Indian consumer here works in a different world altogether.

The point is the way insurance companies charge premiums is changing in a substantive way. And I believe that the risk general insurers take on their books in motor insurance is that of an unruly driver, and not a bad car per se.

Of course, there is the risk of a car being stolen or being destroyed in a natural calamity, but those risks can be statistically compiled. That should be the least of an insurance company’s worries.

Available statistics show that 75% of own damage claims arise from rash driving, head-on collisions or side on collisions and the like. It’s my feeling that going forward, these risks should be separated and priced accordingly in an evolving world.

Similarly, for own damage as well as other risks, it’s pertinent to note that some states, districts and even a few pockets within districts have better motorable roads than the rest. This is by no means an argument for an elitist approach to insurance, but simply a call to reason that risks in different districts or states be recognised for what they are worth and priced accordingly.

Another innovation for Indian markets is the concept of co-pay or minimum deductible. In fact, this concept prevails globally. It means that in case of damage, the insured person puts up the first level of payment — to the agreed limit — and the insurance company takes care of the rest. In effect, this works towards keeping the small expenses out of the insurance network: the consumer takes a rational decision to bear the costs herself or send a claim to the company at the risk of damaging her no-claims record. A voluntary pre-screening of expenses that could be claimed reduces the industry’s loss ratio and eventually, brings down insurance costs.

Oftentimes, the argument for risk-based pricing is confused for a plea to raise insurance rates. In fact, consumers have reasons to rejoice because the facts are exactly the reverse — the rates will be pegged to a scientific determination of risks. The competition in the general insurance industry will ensure the companies will make an all-out effort to educate consumers about the risks that carry a higher weightage.

In any case, the facts speak for themselves: rates have actually — in real terms —come down with the advent of safer cars. With the launch of immobilisers in cars, theft incidence ratio has plunged by more than 50%, resulting in reduction in premium rates.

Broadly, we have seen much more careful driving behaviour on roads as drivers have become conscious of the increasing cost of repairs for even minor dents and bruises. In fact, a sensible insurance pricing regime should encourage people to embrace better driving practices, thereby reducing the overall risks on roads. It is a virtuous circle that we envisage.

Finally, in this changed world, consumers will one day be able to buy insurance for small bundles of risk they deem fit and proper. To take an illustration, car of a particular make may have an excellent record of minimal risk around its electrical fittings and harnesses. Then, it does not make sense for a buyer of such a car to insure against the risk of electric fittings and harnesses — other than in an accident situation.

It all comes together in a scenario where insurance companies become more rigourous in their pricing of risk, and consumers are aware of the risks that they can (or should) insure.

The writer is executive director, ICICI Lombard