Will insurers resist the temptation to cut prices?

 

Comment/KC Mishra

 

Open competition is beneficial to the consumer as well as the insurance industry. Insurers would be able to meet market demands in a timely manner if prior approval for rates and structure of packaging risks are eliminated. Certifying, issuing, soliciting, or using an insurance policy, certificate of insurance, notice of proposed insurance, application for insurance, endorsement or rider that does not comply with IRDA Act or regulations are deceptive trade practices.

 

Often, it is misunderstood that liberalisation means no regulatory oversight; in fact, detariffing will need a lot more regulation.

 

How long will insurers be able to hold out as prices begin sliding down the detariffed market’s slippery slope? That’s the question on the minds of every observer and insurer, as a perfect storm gathers in India’s general insurance business, threatening to start another race to the bottom. Some are cynical as to whether insurers can resist the temptation to follow the market down as prices continue falling.

 

While prices are near acceptable right now, and competitive behaviour is not too bad, history will repeat itself as it happened with marine insurance detariffing. Prices slid down to unrealistic levels and the regulator remained a distant spectator.

 

Despite the fact that Indian insurers not suffer from catastrophic loss events due to poor penetration and continued lack of awareness about general insurance, both primary insurers and reinsurers are unsure about meeting the claims from underwriting income, though some non-PSU insurers claim that way.

 

There is no transparency in the market about insurers’ balance sheets, reserves and dynamic financial planning. There does not seem any statutory right of the policyholders to peruse such financial information at least in the websites of insurers.

 

A casual look at Japan’s regulatory preparedness for detariffing may be interesting for public debate in India.

 

In 1948, Japan had established the Non-Life Insurance Rating Organisation of Japan. By 1951, the organisation’s rating became mandatory for all Japan general insurers. Enactment of the Automobile Liability Security Law in 1955 made automobile liability insurance compulsory. The establishment of Automobile Insurance Rating Organisation in 1964 brought parametric pricing system for automobile insurance.

 

Neither the insurers nor the automobile associations had difficulty in convincing each other about the acceptable premium rates. In 1996 rate-filing system shifted to “Notification” from “Approval”. By 1998, Japan abolished obligation of the members to adhere to organisational rating with 2-year transition period. This was broadly the contour of big bang detariffing. Still, in 2002, the two premium rating organisations merged but facilitated the market through providing indicative rates.

 

Let’s start with the split over a long-term response to detariffing threats in India. After back-to-back years of regulatory adjustments since 2000, IRDA helped launch a high-profile campaign with the goal of establishing a national consensus of some sort. There’s a lot more agreement within the industry than the regulator thought, but on continuing with non-informed decision making. While insurers appear united on the need for a terrorism pool backstop because they agree such a risk is ultimately unpredictable and uninsurable, most give no such grounds on floods or earthquakes.

 

While detariffing front is wide open, regulatory battle continues to tame the likes of brokers, surveyors, agents, actuaries and other public policy institutions, which may even include independent thinkers.

 

 

 

In 1948, Japan established a Non-Life Insurance Rating Organisation

 

By 1951, the organisation’s rating became mandatory for all general insurers

 

The country also has an automobile insurance rating organisation