No more of one-size-fits-all

The general insurance industry has undergone a major transformation in the past few years. Increased consumer awareness of the benefits of insurance has generated many more buyers, doubling the industry's premium income in the past five years.

Antony Jacob        Print Edition: December 28, 2006

A bigger change is in the offing. Detariffing - or the removal of controls on premium rates - will open a new chapter from 1 January 2007. The move will be a major step towards liberalising the insurance market in India, allowing the industry to achieve global standards in underwriting and risk management, besides encouraging innovation.

Insurance companies won't be the only beneficiaries. The abolishment of tariffs will result in major benefits to consumers also. These include increased emphasis on product innovations and world-class customer service; increased price competition, based on actual risk characteristics; greater awareness of the need for independent advice in risk management and risk services; easier access of insurance products through brokers, call centres and the Internet and greater regulatory supervision.

In effect, we will witness three phases of evolution in the Indian insurance market. During the first phase, insurers will have the freedom to price their products, while the existing terms and conditions of the product remain the same. Detariffing will see a shift in the way risks are currently rated. Pricing will vary based on the inherent risk faced by the individual rather than by the broad category. Information provided by the customer will play a key role in deciding the pricing. In the case of motor insurance, the premium rating will be based on the driving habits and experience of the driver and the safety measures being adopted. So, the customer will pay the premium based on his risk profile. For example, a customer who is prone to accidents would have to pay more and safe drivers will pay lower premiums.

The second phase of the tariff-free regime, expected by April 2008, will allow product differentiation. Insurers will be able to provide products customised and packaged to meet the unique requirements of the customers and price them accordingly. Motor insurance customers can expect add-on covers like roadside assistance in case of accidents, spare car etc.

The third phase would be the transition of the Indian insurance market from an infant phase to a mature phase. Currently there are only 14 general insurance companies operating in India, whereas in developed markets like the UK, there are over 400 companies. In 2005, the insurance penetration in India, as a percentage of the GDP, was 0.65% compared to 3.68% in the UK. Similarly, the per capita premium in India is only Rs 176 whereas it is Rs 57,600 in the UK. As the Indian market develops, more players and specialist mono-lines firms will emerge and the market will become more sophisticated attracting global competition and global capital. The focus towards providing value-added features and good quality service will increase considerably. Clearly, detariffing will benefit everyone - insurers, brokers, regulators and consumers.
(The Author is the MD of Royal Sundaram Alliance Insurance Company)

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