Key note address

1
Key note address

• Preparedness for moving away from
• tariffs towards de-tariffed regime
• in General Insurance sector
• C N S Sastry, Advisor, IRDA

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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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REMOVAL OF TARIFFS - 2

• 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

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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

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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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REMOVAL OF TARIFFS - 5

• 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

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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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REMOVAL OF TARIFFS - 7

• 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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REMOVAL OF TARIFFS - 8

• 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

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REMOVAL OF TARIFFS - 9

• What we need to do by 31 March 2006
• Secure Board guidance on all activities related
  to move over to tariff-free regime
• Decide on Underwriting set-up within each insurer
• Decide on classes of risks to be governed by
  internal tariffs
• Prepare interim internal tariffs based on
  available data

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REMOVAL OF TARIFFS 10

• 5. Identify rating factors for every sub-class of
  business
• 6. Modify input screens of insurers IT system to
  capture required data
• 7. Write and test necessary programmes for
  compilation and analysis of captured data
• 8. Commence data capture and analysis
• 9. Make good progress in review of policy terms
  and conditions to be offered

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REMOVAL OF TARIFFS - 11

• 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

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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

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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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REMOVAL OF TARIFFS - 14

• 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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REMOVAL OF TARIFFS - 15

• We should usher in the tariff-free regime
  smoothly to this end, the following rules are
  suggested for consideration
• Cancellation of an existing tariff policy to
  avail of a non-tariff insurance to be at short
  period rates only.
• 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

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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.

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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

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REMOVAL OF TARIFFS - 18

• New rules for File and Use being proposed
• Exposure draft has been issued
• Every insurer to file a document setting out its
  philosophy in rating of risks
• Justification for variation of more than 20 from
  tariff rates
• Clear rules for delegation of authority

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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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REMOVAL OF TARIFFS - 20

• 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