More innovation coming to non-life covers
Irda committee recommends faster approvals for new corporate products and standardized wordings
For the non-life insurance industry, 2007 was important. That year, the Insurance Regulatory and Development Authority (Irda) freed the industry from tariffs or fixed pricing and gave freedom in pricing of covers such as motor (except third-party insurance premiums), fire and engineering insurance policies. Even as the roadmap was laid out, starting with freeing pricing and subsequently the tariff wordings so that insurers, apart from offering competitive prices, could also develop innovative products, the impact of de-tariffing mostly stopped at competitive pricing.
Insurance products continued to adhere to tariff wordings and customers got standard products with some customization through add-on covers. But that’s going to change if the recommendations of the report released by the working group constituted by Irda on ‘file-and-use’ guidelines are accepted.
The report, which came out last week, has made recommendations regarding corporate covers, which will have a far-reaching effect if implemented.
Faster product clearance
The report recommends that product clearance for commercial lines be moved from file-and -use system—where the product is filed with Irda and sold in the market after approval—to ‘use-and-file’ system—where products can be marketed without waiting for Irda’s approval. This will not only hasten product clearance, but will also encourage product innovation given that insurers will not have to wait for Irda’s stamp of approval, which can be a long drawn process. For retail customers, file-and-use will continue.
“Companies usually need flexibility in coverage and wordings to manage the risk and they are normally equipped to negotiate with the insurance market directly or through brokers. Retail customers, on the other hand, use relatively simple products and so standardization helps them avoid surprises," said Sanjay Kedia, country head and chief executive officer, Marsh India Insurance Brokers.
However, to ensure that insurers use similar wordings to describe the same cover, and to simplify wordings for retail customers as well, the report has recommended India market wordings. “Standardization of wordings will bring more clarity in existing contracts. For example, in motor insurance, a clause says that a policy cannot be given to a vehicle unless it is road worthy again after an accident. But what damages make a vehicle unworthy for the road are not clear. So, simplification of wordings will give us a chance to make contracts easy to understand. The focus of the report is to simplify insurance contracts," said Tapan Singhel, chief executive officer and managing director, Bajaj Allianz General Insurance Co. Ltd.
The report also recommends that these wordings be developed by the General Insurance Council, an industry body, through committees of underwriters and actuaries. “A major concern is that the wordings shouldn’t develop to be restrictive. Market wordings adopted by the US, the UK, Australia and by international reinsurers are fairly simple to understand, and we should look at adopting those wordings and principles to the extent possible," said Kapil Mehta, managing director, SecureNow Insurance Broker Pvt. Ltd.
Innovation in products
The report’s focus is on freeing up commercial lines of business, but retail policies should also see some boost in innovation if insurers get the leeway to pilot-test products. It said that after de-tariffication of the general insurance market, it was expected that insurers will come out with innovative products. Insurers did introduce some new products, but the pace has been slow. One of the reasons cited for this was the file-and-use process, which requires complete filing before any sales. Often, insurers develop a product concept but aren’t sure of its response. Pilot products are expected to provide this opportunity to experiment and innovate, it added.
Time taken to approve a product is indeed a hindrance. “Currently the system of approval is quite cumbersome and long. Pilot testing in that sense is a welcome step, as we will not only be able to focus on innovation but having tested the product on the ground can expect faster clearance," said Mukesh Kumar, executive director, HDFC ERGO General Insurance Co. Ltd.
For this purpose, the insurers will be allowed to launch pilot products for a short period in a defined area and with pre-determined exposure limits, after informing Irda. If it’s a retail product, the file-and-use process remains. “The products will continue to be standardized but now the insurers will be encouraged to customize products by packaging them and by add-ons. The product innovation is already happening with most companies coming out with variants and new products. We have already started working on a long-term policy in the motor segment," said Kumar.
But there are concerns. “We need more clarity on what pilot-testing products will achieve, because the insurers would still be selling the products, although to a small set of customers," said Singhel. “We need to better understand the steps that will be taken if the products are not up to the mark, or if the policyholder is unhappy with the product, or if the policyholder wants to renew the policy and the product isn’t approved," he added.
Customized pricing
Freedom of differential pricing will impact the retail segment also. According to the report, the industry feels that insurance sold to every customer cannot have “one price" as that would be akin to a tariff market and would throttle skill development of underwriters as underwriting decisions would be ruled by the same algorithm. Therefore, the report has recommended that pricing flexibility be allowed to the extent of acquisition cost and profit margin built in the product, with the overriding condition that the combined ratio of the product should remain below 100%. Combined ratio (expense ratio plus the loss ratio) indicates the profitability of a product. A ratio of over 100% means that the product is not profitable. “At present, we file only one rate. But with freedom in pricing, customers with a better profile would get better rates. But to obviate predatory pricing and cut throat competition, the report recommends we stay below a combined ratio of 100%," said K.G. Krishnamoorthy Rao, managing director and chief executive officer, Future Generali India Insurance Co. Ltd.
Since the recommendations lend greater freedom to the insurer, to keep checks within the company, the report has also recommended the setting up of a board-led Product Management Committee. Its role would be to offer internal self-regulation. It will be headed by a board member who does not have executive responsibilities, and will include the chief executive officer, the appointed actuary and the chief underwriter, at the minimum.
General insurers are already working on innovative products. In motor insurance, for instance, there are add-on policies that offer cover beyond the standard policy. The zero depreciation cover, for instance, pays for full cost of damaged parts instead of just the depreciated costs. Insurers are also working on more customization. “The industry is already working towards innovative products like short duration products and packaged products. For instance, a person who plans to take a vacation may want a 15-day policy to cover burglary, but right now there isn’t any such product. These recommendations encourage innovation," said Singhel.
These recommendations do not apply to health insurance. The report is available on www.irda.gov.in, under ‘what’s new’, and it invites feedback from the public.
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