New Delhi: The price war in general insurance products is far from over. Come September, and the premiums on fire, engineering and motor policies may fall by as much as 70 per cent, say industry insiders. With the Insurance Regulatory and Development Authority (Irda) expected to make pricing more liberal by then, companies are preparing to unleash a fresh round of price war.
However, before you pop the champagne, be warned that the cheaper cover may come at a higher risk. Customers run the risk of foregoing important risk covers, say industry insiders. “This is the time where customers need to be careful because in the rush to save premium, they may be foregoing certain risk covers that they have enjoyed in the past and they may not fully understand the long-term implications of their choices,” Prudent Insurance Brokers vice-president, international business, Pavanjit Singh Dhingra said.
“What is expected going forward is, the same products will be priced much lower. Indiscriminate discounting without proper risk management measures is dangerous for the industry,” he added.
Interestingly, both public and private insurers are accusing each other of initiating the price war. Free pricing kicked off in January 2007, with the regulator giving controlled freedom to insurers to slash prices within prescribed bands.
After detariffing, Irda had restricted discounts to 20 per cent for fire and engineering, and 10 per cent for motor rates for the first month till filed rates were approved. The bands prescribed further allowed an additional 25 per cent discount on new rates. The present Irda guidelines stipulate that maximum discount for individually rated risks is 51.25 per cent.
And there are many voices in the industry that support free pricing and even a price war. “As long as solvency margin requirements are met, insurers should be allowed to price as per the strength of their balance-sheets. If a risk can be underwritten at a 70 per cent discount, then so be it, as long as it is quoted on the face of the policy,” an official at a public sector general insurer said.
“It is expected that September would test new lows in terms of pricing and discounts with the market stabilising after a few months,” an analyst said. Already, pricing rather than underwriting, is raking in volumes under the free-pricing regime.
The breaches are both in terms of higher discounts, and discounts being offered without the necessary risk parameters being in place. “The IRDA does not have adequate policing mechanisms to take action against this,” a CEO of a insurance company said.
Further, IRDA is also in favour of advancing the date when insurers can make changes to existing products to January 2008, from April 2008. By advancing the date to January, insurers will be able to introduce gradual changes to products well in advance so that they are comfortable when policies are renewed in April.
Already, the general insurance council is working on the standardisation of formats and interpretation of clauses. The industry is expected to have 2-3 standard formats by January 2008. The IRDA has said that it will examine the recommendations made by the council and consider advancing the date from April 2008.
However, insurers are not in favour of tweaking policies too much, because it might affect the rates at which their reinsurance treaties are negotiated in April next year. “Reinsurers might not like too much unpredictability in the policies,” an industry source said.
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