Key note address

Preparedness for moving away from

tariffs towards de-tariffed regime

in General Insurance sector

C N S Sastry, Advisor, IRDA

REMOVAL OF TARIFFS

• Most important event post opening up

• Competition will be fierce and unmindful of viability for insurers

• Market behaviour can have serious effect on companies’ solvency margins

• Essential to moor pricing on sound technical base to prevent market going out of control

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• Movement to non-tariff market needs to be carefully managed

• Insurers have to do many things internally to prepare themselves

• Underwriters and actuaries have to ensure that rating is based on sound technical considerations

• Marketing personnel have to be educated in guiding competition along right lines

REMOVAL OF TARIFFS - 3

• Brokers and agents have to be guided to use other factors than price alone in selection of insurers and the insurance plans

• Clients have to be educated to be more discerning buyers of insurance

• Insurers need to engage the major clients in dialogue to guide competition along right lines and not just buy the cheapest

REMOVAL OF TARIFFS - 4

• Underwriting staff at various levels have to be identified and trained

• Levels of authority defined both in respect of class rated risks and individual rated risks

• Internal underwriting audit to be set up

• Actuarial inputs for large premium quotations

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• Insurers and brokers together need to evolve a Code of Conduct for keeping competition on a sound technical footing

• IRDA will closely monitor market behaviour and may have to step in if the methods of competition become harmful to the long-term good of the market

• Desirable to avoid forcing IRDA to intervene

REMOVAL OF TARIFFS - 6

• Target date for removal of tariffs: 1 Jan 07

• Much needs to be done to ensure that the transition will be smooth and orderly

• Companies have to work to a time schedule to complete all the necessary tasks in time for move to non-tariff market

• Underwriters and Appointed Actuaries have a major role in the matter

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• IRDA circulated a Preparedness Assessment Form to draw the attention of insurers to the various tasks that need to be accomplished

• Responses have in general been to say that insurers are prepared

• However, several underwriters have expressed concern in private about the enormity of what needs to be done

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• Cannot afford to go wrong. So, it is worthwhile discussing the various issues frankly and ensuring that all tasks are accomplished well in time

• Appointed Actuaries can only be effective if the statistical base is created in a manner that it can support rating of risks

• Even those insurers who claim to have the availability of statistics should see if the statistics are adequate to support rating by every hazard factor

REMOVAL OF TARIFFS - 9

• What we need to do by 31 March 2006:1. Secure Board guidance on all activities

related to move over to tariff-free regime2. Decide on Underwriting set-up within

each insurer3. Decide on classes of risks to be

governed by internal tariffs4. Prepare interim internal tariffs based on

available data

REMOVAL OF TARIFFS – 10

5. Identify rating factors for every sub-class of business

6. Modify input screens of insurer’s IT system to capture required data

7. Write and test necessary programmes for compilation and analysis of captured data

8. Commence data capture and analysis9. Make good progress in review of policy

terms and conditions to be offered

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• TAC has already done a lot of work on defining data requirements. Similar work to be done for major non-tariff classes as well

• This needs to be reviewed in depth by each insurer and then adopted as the basis for compilation of statistics at the market level

• It is necessary to capture Sums insured rather than premiums as the denominator to arrive at burning cost and not claims ratio

• Let us discuss where we stand on this matter

REMOVAL OF TARIFFS - 12

• Insurances currently are on full sums insured basis with condition of average being applicable

• Change to first loss basis or even just deletion of the condition of average is not a simple change; it needs to be properly evaluated and rates should be technically justified

REMOVAL OF TARIFFS - 13

• First loss rating scales have to be drawn up and there will be several different scales depending on nature of business

• Allowances for deductibles or franchise also have to be properly assessed based on claims profiles

• Linked to first loss rating scales will also be the reinstatement provisions

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• As stated earlier, let us not plunge into cut throat competition without proper statistics to support the terms we quote.

• No harm will be done if the market works together in areas where individual company statistics or even market-level statistics are deficient

• Adopt guide rates and schedules for say, one year and then review later

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• We should usher in the tariff-free regime smoothly; to this end, the following rules are suggested for consideration:

1. Cancellation of an existing tariff policy to avail of a non-tariff insurance to be at short period rates only.

2. Rates to be quoted should not vary from tariff rates by more than 20% either way without credible statistics to support the non-tariff rates

REMOVAL OF TARIFFS - 16

3. Terms and conditions of cover to be same as tariff for at least 6 months after 1 Jan 2007 to enable well considered changes

4. No insurances to be granted on first loss basis until the insurer files with IRDA, the first loss rating scales and secures approval. Such rating scale to be followed strictly in all cases on first loss basis.

REMOVAL OF TARIFFS - 17

5. Reductions in premium for higher deductibles must also be properly supported by statistical evidence

6. Package premiums must be derived by aggregation of unit premiums

7. Group discount rates must be statistically justified

REMOVAL OF TARIFFS - 18

• New rules for File and Use being proposed

• Exposure draft has been issued:

1. Every insurer to file a document setting out its philosophy in rating of risks

2. Justification for variation of more than 20% from tariff rates

3. Clear rules for delegation of authority

REMOVAL OF TARIFFS - 19

4. Set up underwriting audit machinery

5. Appointed Actuary to give his observations on the above matters

6. 100% audit by Actuary of terms quoted for risks with S.I. exceeding Rs. 100 crores for property or Rs. 10 crores for liability, sample audit of other cases to ensure compliance with company policy

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7. Appointed Actuary to approve terms quoted for special contingency policies with S.I. over Rs. 5 crores

8. Quite detailed filing form and certificates being proposed with questions on rating method and statistical support

9. In short everything being done to focus attention on technical underwriting