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Third-party insurance pricing should be based on the driver

The problem is also in the way motor policy is structured
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First Published: Tue, Oct 30 2012. 08 42 PM IST
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Magma HDI General Insurance Co. Ltd has entered the non-life insurance sector only recently. Not only has the company chosen to headquarter itself in Kolkata, one of the relatively uncommon cities in the financial sector, but has also decided to target smaller towns and cities instead of metropolitan cities. Swaraj Krishnan, chief executive officer, Magma HDI General Insurance, talks to Mint Money about the company’s first offering, which is a motor insurance policy, and what measures are needed to customize auto insurance.
Your first product is motor insurance and you plan to focus on smaller cities. Why?
Our parent company—Magma Fincorp Ltd—has a good reach in smaller cities. Also, we see immense scope for the comprehensive motor insurance product in these markets. In these areas, motor insurance is sold through the insurer-dealer tie-up and normally it’s the third-party cover that gets sold. We want to tap the market for comprehensive cover, which is nascent.
What is unique about your comprehensive insurance product?
Right now, nothing much. Our product will offer the mandatory third-party cover, own-damage cover and passenger insurance.
We want to focus on services like offering cashless settlement of claims. Insurers so far have focused on such services in urban cities, so we have scope to distinguish ourselves by offering cashless services in the lesser serviced areas in semi-urban and rural areas. Another target is renewal of policies.
After the industry got de-tariffed in 2007, we were looking forward to differential pricing based on the colour of the car and the qualifications of the driver, among others. Why hasn’t that happened yet?
There is serious lack of data in the general insurance industry. The problem is also in the way motor policy is structured—it is based on the parameters of the car rather than that of the driver. In my opinion, pricing of motor insurance premium should be based on the driver and driving license instead of the vehicle.
Think of it like this: the car itself will not hit someone on its own, so if you can get a fair idea of the capabilities of the driver, the pricing of third-party cover can be done accordingly. Even in own-damage cover, we will have greater flexibility. For instance, depending upon the usage of the car (the distance it covers on average everyday), we can price the cover.
What stops you from changing the pricing accordingly?
We can’t change the third-party section of the policy because the product is controlled by the Motor Vehicles Act and the pricing is centrally governed. The Act does not comment on the own-damage portion of the policy. The Indian market has traditionally given a comprehensive policy document, which covers both third party and own-damage. If we can delink the document, then at least the own-damage part can be customized and priced accordingly.
The life insurance industry has asked for a “use and file” system and in a recent meeting with the finance minister, even non-life insurers raised the same demand. But if the Insurance Regulatory and Development Authority (Irda) finds a problem later, wouldn’t it be difficult to call back the already-marketed product?
I think this worry is more relevant for long-term products. But non-life products are short term. Even if a product has a flaw, Irda can ask the company to stop selling it from next year. Also, here there are some standardized products. For instance, for third-party covers, the premiums are decided by Irda and the product by the Motor Vehicles Act. So where is the need to file and use?
Last year, Irda replaced the third-party claim pool with a declined risk pool. As a new entrant, how will this affect you?
This has no impact for us since we are starting business only now, after the pool was dismantled. Under the old arrangement, the insurance companies ceded the entire premium to the pool and shared the losses only to the extent of their market share. The reason why the third-party pool was dismantled was because insurers didn’t manage the pool well. So a declined risk pool is a step in the right direction which requires that a company retain some portion of the risk instead of ceding it completely.
Irda has mandated quota for each company for stand alone commercial vehicle TP policies. In fact, cessations to the pool have come down to levels that suggest that with the last increase in prices, the portfolio is more manageable. I would believe that if the stated amendments to the Motor Vehicles Act, especially in respect of limits on liability, are brought about, this portfolio can also be de-tariffed in the future.
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First Published: Tue, Oct 30 2012. 08 42 PM IST
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