IMPACT OF DE-TARIFFICATION ON
PROFITABILITY OF NON-LIFE INSURERS
December 08, 2011
By:
V. Subramanian
Head Underwriting,
SBI General Insurance Co. Ltd.
DE-TARIFF – NEED
 the products need to be priced equitably based
on their individual loss potential
 tariff rates were higher than rates for similar
risks in other parts of the world.
DE-TARIFF – ADVANTAGES / DISADVANTAGES
ADVANTAGES
 Competition will improve efficiency
 Efficiency will lead to reduction of premium and benefit
 It is part of the reforms towards liberalized economy.
DISADVANTAGES
 De-tariffication may make insurance unavailable at
reasonable premium
Companies may form cartels and jack up the premium
Free market may lead to insolvency of companies and
loss of protection for policyholders.
DE-TARIFF – INDIAN EVOLUTION
Phase I : The withdrawal of premium pricing
restrictions
April, 2004 – marine cargo
April, 2006 – marine hull segment and
September, 2007 – Fire, engineering, WC and motor own
damage (OD) segments
DE-TARIFF – INDIAN EVOLUTION
Phase I : The withdrawal of premium pricing
restrictions
Part 1: Reduction in Tariff rate by 25% and further allowance
of deviation from tariff rate
Type of Product
Individual Rated
Class Rated
Deviation Allowed Effective Total
from Revised tariff Variation for Earst
base rate
while tariff rate
Up to 35%
51.25%
Up to 25%
43.75%
Part 2: Complete de control over pricing from September,
2007
DE-TARIFF – INDIAN EVOLUTION
Phase II :Relaxation in terms and conditions
2009 – Some relaxation in terms and conditions of coverage
of erstwhile tariff classes of business in Fire, Engineering,
Motor (OD) and Industrial All Risk (IAR).
For example,
1.
Insurers are now permitted to file variations in deductibles
from those prescribed under erstwhile Fire, Engineering, IAR
(Industrial All Risks) and Motor OD tariffs.
2. Insurers are also now permitted to file add-on covers over
and above the erstwhile tariff covers in Fire, Engineering, IAR
and Motor OD with appropriate additional premium
DE-TARIFF – INDIAN EVOLUTION
We will see following two Phases in coming time
as evolution process goes on
Phase III : Risk Based Pricing
Opened up opportunities for migrating to risk
based pricing.
Phase IV: Complete Detariffing
Choice in terms of breadth of coverage
DE-TARIFF - PRESENT SCENARIO
Scope
a. Rates
De-tariff Scenario
Free – Complete De-tariff
Resulting into blanket reduction in
the insurance premiums without
giving weight on risk based pricing
b. Add on Cover & Earlier tariff driven, presently new
Clauses
wordings as per international
market are filed by Insurance cos.
and approved by IRDA
c. Policy Wording Tariff driven
DE-TARIFF - IMPACT
Soft market : Abolishment of price control in the
Indian market had led to drastic reduction in the
premium rates being offered by the Indian
Insurance Companies. This is due to excess capacity
availability or in other way low insurance demand in
India.
It is not sustainable to do business for Indian
Insurance company at the prevailing rates. This has
increased stress on the capital requirement of
many insurance company.
DE-TARIFF – PROFITABTILITY STATISTICS
Indian Insurance Industry - All Lines Combined
(Rs. In bn)
Year
2006-07
2007-08
2008-09
2009-10
2010-11
GDP
Rs.
Rs.
Rs.
Rs.
Rs.
271.40
304.80
335.60
392.30
482.10
U/w Result
Rs.
Rs.
Rs.
Rs.
Rs.
32.10
17.50
-1.20
-5.70
-31.70
PBT
Rs.
Rs.
Rs.
Rs.
Rs.
59.60
50.30
30.60
27.90
8.10
DE-TARIFF - PROFITABTILITY STATISTICS
Industry - Gross Domestic Premium
Rs. 600.00
Rs. 482.10
Rs. 500.00
Rs. 392.30
Rs. In Billion
Rs. 400.00
Rs. 300.00
Rs. 271.40
Rs. 304.80
Rs. 335.60
Rs. 200.00
Rs. 100.00
Rs. -
2006-07
2007-08
2008-09
2009-10
2010-11
DE-TARIFF - PROFITABTILITY STATISTICS
Industry - Underwriting Result
Rs. 40.00
Rs. 30.00
Rs. 32.10
Rs. In Billion
Rs. 20.00
Rs. 17.50
Rs. 10.00
Rs. -
Rs. -1.20
Rs. -10.00
Rs. -5.70
Rs. -20.00
Rs. -30.00
Rs. -31.70
Rs. -40.00
2006-07
2007-08
2008-09
2009-10
2010-11
DE-TARIFF - PROFITABTILITY STATISTICS
Industry - Profit Befor Tax
Rs. 70.00
Rs. 60.00
Rs. 59.60
Rs. In Billion
Rs. 50.00
Rs. 50.30
Rs. 40.00
Rs. 30.00
Rs. 30.60
Rs. 20.00
Rs. 27.90
Rs. 10.00
Rs. 8.10
Rs. -
2006-07
2007-08
2008-09
2009-10
2010-11
DE-TARIFF - PROFITABTILITY STATISTICS
Indian Insurance Industry (Rs. In bn)
GDP
U/w Result
PBT
Rs. 482.10
Rs. 392.30
Rs. 271.40
Rs. 59.60
32.10
2006-07
Rs. 304.80
Rs. 50.30
17.50
2007-08
Rs. 335.60
Rs. 30.60
Rs. 27.90
-1.20
-5.70
2008-09
2009-10
Rs. 8.10
-31.70
2010-11
DE-TARIFF - PROFITABTILITY STATISTICS
Fire Class (Rs. In bn)
GDP
U/w Result
Rs. 48.90
Rs. 41.87
Rs. 36.38
0.85
0.35
2008-09
2009-10
-2.57
2010-11
DE-TARIFF REGIME – INDUSTRY SCENARIO
 Rates
are still soft – no sign of hardening
 Wider coverage are being offered keeping price
intact e.g.
Coverage for Contingent Business Interruption
 T&D line with higher limits etc.
Favorable move by GI Industry with regard to
Deductibles – Agreed to minimum deductible to be
maintained across the industry
DE-TARIFF REGIME – CONCLUSION
 Upward Correction in premium rates is must to
enable insurance industry to sustain in long run
 Urgent need to move on to the Risk Based Pricing
approach
 Insurance Companies to improve their efficiencies
to sustain their business in the current scenario