De-tariffing is the way forward

Motor insurance continues to be mandatory for all vehicle owners in India given the risk of third-party losses. Traditionally, cover features, coverage, exclusions and prices have been standardised and governed by the India Motor Tariff (IMT). As the prices were predefined on the basis of location, vehicle category and age, the customer could not differentiate among insurers to bag a good deal. All this changed with the introduction of the free pricing regime in 2007.

De-tariffing was implemented in two phases. In the first wave, insurers were allowed to modify the premium by 20 per cent from the earlier tariff rates, but the product terms and conditions were not allowed to be revised. As a result, though insurers started pricing motor insurance on the basis of risk assessment, people were deprived of customised products and complete free pricing.

In the second phase, which came into effect in March 2008, insurers were granted the freedom to price their damage coverage, including the customisation of add-on covers. Since then, additional rating parameters like the colour of the vehicle, the driver's profile, sex, profession, etc, have become important to pricing. Partial de-tariffing has paved the way for customer segmentation— rewarding good customers over the loss-making ones, thereby eliminating cross subsidisation to some extent. Because of this, a customer with a good risk profile can now expect an insurance quote at a lower price.

With the more recent launch of motor add-ons, such as zero depreciation, insurers are trying to overcome the earlier restrictions on policy terms and conditions imposed by the IMT. In the current scenario, features like bundled products, pricing freedom for third-party risks, etc, are still not available with the insurers. Underwriting two-wheeler policies remains a challenge for insurance companies due to the low premium coupled with the exorbitant operating costs. Around 80 per cent of two-wheelers remain uninsured in India. Hence, to bring a wider range of two-wheelers under the insurance net and to avoid renewal hassles for customers, the introduction of multi-year policies is required. This may be of great help to the customer as well as the industry.

In an evolving market, the quality of customer service and product innovation are bound to become key differentiators among insurers. In turn, need-based product development and launches will increase the level of insurance penetration. But all this can only be achieved with complete de-tariffing.

At the industry level, de-tariffing will eventually lead to an enhancement of risk assessment skills among insurers, product innovation, better customer service and an increase in the operational efficiencies. As a result, customers will be able to enjoy a wider choice of products with better risk covers. In addition, they will see the merit in maintaining a good profile, which translates to a favourable risk rating.

Complete de-tariffing will also lead to specialisation and will, in turn, lead the Indian market to achieve global standards in underwriting and risk management.

Ajay Shah is Head of Customer Service, Motor, at ICICI Lombard GIC