Almost all general insurers violated the Insurance Regulatory and Development Authority's (IRDA) regulations on pricing of risks, which were freed from tariff controls from January 1, 2007. IRDA officials noticed the breach of pricing regulations during inspections in June.
While freeing the non-life insurance industry from tariff controls, IRDA had put a cap on discounts that could be offered by insurers for fire, engineering and property insurance.
The maximum discount that general insurers could offer was capped at 51.25% of the erstwhile tariff rates on individual-rated products (those risks where the sum insured is more than Rs 10 crore) and at 43.75% in the case of class-rated products (those risks whose sum insured is less than Rs 10 crore) and 20% on motor own damage for private vehicles.
IRDA officials, industry sources said, found that some insurers were offering discounts more than they were permitted, while some others differed on the base rates from what were filed with the regulator.
About 75% of the non-life insurance industry, which consists of fire, engineering and motor covers, was under tariff up to December 2006. This meant that insurers had to follow the rates prescribed by the Tariff Advisory Committee (TAC), irrespective of whether the risk was good or bad.
Though all lines of businesses were detariffed, the mandatory third-party motor insurance portfolio, which was a loss-making proposition for insurers, could not be detariffed.
Impact of detariffing
The non-life insurance industry witnessed a slower growth this year, with insurers offering discounts on profitable portfolios such as fire, engineering and motor own damage.
The gross premium underwritten for the total general insurance industry increased by 11.5% to Rs 16,279 crore in the seven months ended October 31, 2007, from Rs 14,609.60 crore a year earlier. The growth was half of what was experienced in the previous year.
Reinsurance hurdles
Insurers faced hurdles on renewing their treaties on April 1, 2007. With insurers offering discounts in excess of 50% on property premiums, Munich Re, the world's largest reinsurer, withdrew the reinsurance support to several insurers, while the year marked the entry of several foreign reinsurers such as Zurich-based Converium, SCOR, Berkshire Hathway and Korea Re wanting to capture a bigger market share in India.
Cross-subsidisation ends
Detariffing brought to end the highly prevalent practice of cross-subsidising group mediclaim for companies with the profitable fire portfolio.
Prices for group mediclaim as well as retail health insurance policies have since shot up. Detariffing is likely to bring about a greater focus on retail lines of businesses such as health, motor and home insurance.
Preparation for 2008
IRDA has agreed to give full-pricing freedom from January 1, 2008. From April 1, 2008, IRDA will be giving insurers the freedom to change the terms and conditions of insurance policies.
The General Insurance Council (a self-regulatory body of all insurers) has developed common market wordings that will be used by all insurance companies once IRDA allows insurers the freedom to frame their own wordings.
