Based on the feedback received on the exposure draft guidelines on File & Use procedures, IRDA requirements for consideration and review of products under File & Use guidelines along with underlying logic are as under: (i) Design and rating of products must always be on sound and prudent underwriting basis. The contingencies insured under the product should be clear and provide transparent cover which is of value to the insured. (ii) All literature relating to the product should be in simple language and easily understandable to the public at large. As far as possible, a similar sequence of presentation may be followed. All technical terms should be clarified in simple language for the benefit of the insured. (iii) The product should be a genuine insurance product of an insurable risk with a real risk transfer. Alternate risk transfer or financial guarantee business in any form will not be accepted. (iv) The insurance product should comply with all the requirements of the Protection of Policyholders Interests Regulations 2002. (v) Insurers should use as far as possible, similar wordings for describing the same cover or the same requirement across all their products. For example clauses on renewal of insurance, basis of insurance, due diligence, cancellation, arbitration etc., should have similar wordings across all products.
(vi) The pricing of products should be based on appropriate data and with technical justification. (vii) The terms and conditions of cover shall be fair between the insurer and the insured. (viii) Margins built into rates shall be consistent with the experience of the insurer in respect of commission, management expenses, contingencies and profit. (ix) Insurer should take necessary steps in ensuring that competition will not lead to unprincipled rate cutting and other improper underwriting practices.
FINAL TAKE OFF
Finally, the IRDA confirmed withdrawal of tariffs effective from 1st January, 2007. It was reiterated that the tariff general regulations, other than those relating to rating viz. terms, conditions, clauses, warranties, policy wordings etc. shall continue to be followed until further orders. In case of the mandatory motor TP, where the insurers have been expressing difficulty to underwrite unless they are permitted to charge the premium that they consider appropriate (which means heavy premium in commensuration with high claim ratios of motor portfolios) rates are prescribed by regulator. The Authority also issued Order directing insurers that they shall not refuse cover for third party risks. The underlying reason for existence of price regulation is consumer pressure to avoid enhancement of premium and to ensure that insurers shall provide motor third party liability insurance cover to all vehicles. Formation of Motor Third Party Insurance Pool As per Section 34 of the Insurance Act, the IRDA directed that all general insurers registered to carry on general insurance business including motor insurance business or general reinsurance business shall collectively participate in a pooling arrangement with the following provisions to share in all motor third party business written by any of the registered general insurers: 1. Participation in pooling arrangement: Every insurer registered to carry on general insurance business (including motor insurance business) or general reinsurance business shall automatically participate in the pooling arrangement to the extent set out herein. 2. Underwriting insurers: Every underwriting office of every insurer that is authorized to underwrite motor insurance business for the insurer shall also be authorized to underwrite motor third party insurance business that will be shared among all insurers through the pooling arrangement.
3. Pooling mechanism: The pooling of business among all insurers will be achieved through a multi-lateral reinsurance arrangement between the underwriting insurer and all the other registered insurers carrying on general insurance business s (including motor insurance business) and general insurance reinsurers. 4. Participation in motor third party insurance pooled business: The participation of General Insurance Corporation of India (GIC) in the Pooled business shall be such percentage of the motor business that is ceded to it by all insurers as statutory reinsurance cessions under Section 101A of the Insurance Act. The business remaining after such cession to GIC shall be shared among all the registered general insurers writing motor insurance business in proportion to the gross direct general insurance premium in all classes of general insurance underwritten by them in that financial year. 5. Underwriting of business: Underwriting offices of insurers shall follow the underwriting instructions of the General Insurance Council in the matter of procedures for underwriting and documentation and accounting and settlement of balances. The business shall be underwritten at rates and terms and conditions of cover as notified by the Authority from time to time. No vehicle owner shall be denied third party insurance cover in respect of his vehicle which is holding a valid permit for use on public roads except on grounds of attempted fraud.
6. Claims processing and settlement: All claims in respect of third party death or injury or physical damage shall be processed for settlement in a speedy and efficient manner in accordance with the instructions of the General Insurance Council. For this purpose, the Council shall adopt a pro-active claims settlement policy adopting the most efficient claims processing practices possible. 7. Administration of the Pooling arrangement: The GIC shall act as the administrator of the pooling arrangement. It will act under the guidance of the General Insurance Council. For this purpose, the Council may establish such Committees of insurers as are necessary to operate the Pooling arrangement and process and settle claims in the most efficient manner. 8. Remuneration: There will be no agency commission or brokerage payable in respect of motor third party insurance business. The underwriting insurer will be paid a reinsurance commission of 10% on the premium ceded by it to all the other insurers and reinsurers. The GIC as administrator shall be paid a fee of 2.5% of the total premium on motor third party insurance business in respect of the business underwritten for the pooled account. Each insurer shall bear the cost of hardware required to operate the pooling arrangement within its offices. The GIC will bear the cost of hardware necessary to administer the pooling arrangement in its offices. The cost of the operating software for the pooling arrangement shall be shared by all the insurers and reinsurers in the manner decided by the General Insurance Council. Each insurer shall bear the cost of travel of its executives to attend to the work relating to the pooling arrangement. However, any travel specifically to service a claim shall be recoverable as claims related expenses.
9. Agreement: The insurers and GIC shall enter into a multi-lateral reinsurance arrangement to give effect to this pooling scheme. 10. Review: The Authority will review the operation of the pooling arrangement and the need for regulation of the premium rates and terms of cover and will issue such directions from time to time as may be considered necessary Managing the Transition It may be noted carefully that de-tariffing does not imply or mean that the companies can set the premium whimsically. It facilitates setting competitive premium model where there is neither excessive pricing nor non-viable premium undercutting which may create instability. The companies are encouraged to promote better underwriting decisions and the products filed have to be justified with supporting data regarding the rates. If the companies were to undercut the premium to uneconomical levels, then again they would be brought back by the losses that they may face. Therefore, IRDA, since its inception firmly believed that sustainable growth in the insurance industry is possible only in an environment which values and promotes financial stability, increased management capability and total public accountability. This necessitates in turn, good corporate governance practices to be followed in the companies as well as with the regulator. With this objective the Authority conducts off-site and on-site supervision at periodic intervals in order to assess the soundness of the insurance company.
TARIFF ADVISORY COMMITTEE
The Tariff Advisory Committee (TAC) is a statutory autonomous body in India under the Insurance Act, 1938. It formulates and administers tariff for major classes of General Insurance business such as Fire and Allied perils, Petrochemicals, Marine Hull, Engineering and Motor etc. TAC also regulates terms and conditions that are offered by the insurers. The TAC is a body of experts headed by the Chairman of the (IRDA) GIC as an ex-officio Chairman, and representatives from insurance companies, Ministry of Finance and Bureau of Industrial Costs and Prices (BICP), Government of India. Further, technical groups consisting of representatives of insurers as well as of the TAC have been constituted for various classes of insurance. These groups assist the TAC in making changes in ratings from time to time, in relation to loss experience. The TAC, while evaluating and rating a risk takes into consideration, the past loss record and physical features of the risk such as safe distances between blocks, provision for Fire fighting appliances, and good house-keeping. Further, the TAC also specifies special ratings and discounts to extend the benefits of lower premiums to the insured. The TAC at regular intervals interacts with the insured’s interest groups, Surveyors, Associations, Trade bodies, and other forums. It also advises on upgrading safety standards, and makes publications of Fire Protection Systems and Building regulations etc.
History of TAC in the pre and post De-tariffed era Before understanding the role of TAC in the detariffed regime, a brief peep into the past history of TAC will throw light on the objectives behind the setting up of this committee, the reasons leading to the government to detariff and the role assumed by this committee at present in the detariffed regime. Basically, Insurance in India started without any regulations in the nineteenth century of British colonial era. However, after the independence, the Life Insurance business was nationalized in 1956, and the general insurance business was nationalized in 1972, with 4 insurance companies operating under the supervision of General Insurance Corporation of India (as discussed in the earlier part of this chapter). It was expected that the subsidiary companies would provide effective competition to each other. As seen, these companies acquired considerable experience, expertise and financial strength over the decades and also established reasonable standards of conduct of BUSINESS.
Role of TAC in the present de-tariffed era With the abolition of tariffs, the role of Tariff Advisory Committee has undergone a change. TAC is now entrusted with the following functions in the changed scenario: - Collection of data on premiums and claims, analysis of such data and dissemination of the results to the insurers - Report to IRDA on the underwriting health of the market and any aberrations in market behaviour - Constitution of Expert Groups at the request of the General Insurance Council, to look into underwriting issues and recommend necessary action - Organize training to underwriters at the market level and - Attend to public grievances on non-availability of insurance and try to resolve the issues by discussion with insurers. Therefore, finally Detariffing refers to the withdrawals of rates in specified class of insurance by the Regulator. In other words, it means all the insurers have the freedom to price based on their experience and judgment. It improves the variety and make competitive the price of insurance products. The Committee also recommended that the area under tariffs should be progressively reduced with the object of limiting it to only few classes to promote competition and improve underwriting skills.
LOSS PREVENTION ASSOCIATION OF INDIA (LPA)
It was due to the increasing incidence of fire accidents, road mishaps, industrial accidents, damage to cargo resulting in loss to cargo and life that the GIC has initiated steps in setting up of the LPA to prevent such losses and minimize their consequences. The Loss Prevention Association of India Ltd is engaged in promoting safety and loss control through education, training and consultancy in India and abroad. The LPA is a company limited by guarantee established in January 1978. It is sponsored by the GIC of India and its four subsidiaries. GIC and its subsidiaries provide the entire finances for all its activities. Membership subscription and fees for services are also source of finance for LPA. LPA’s work involves both educational and engineering aspects of safety. To meet these requirements, the Association employs a team of professionals with expertise in various technological aspects of loss prevention. While, the insurance companies constitute ordinary members, some of the organizations such as Central Building Research Institute, Central Road Research Institute, Indian Institute of Packaging, and Indian Standards Institute, are honorary members of LPA.
The main objectives of the LPA are as follows: To create awareness and appreciation of the need for loss prevention and loss reduction. To provide advice and expertise on techniques of loss prevention To educate public and workers in techniques of loss prevention. To support research efforts in various fields of loss prevention. To organize and supervise facilities at marine terminals for cargo loss minimization. To organize fire salvage operations. The activities of the LPA are very wide and comprehensive ranging from conducting mass communication campaigns to draw the attention of the public for the need and methods of loss prevention. Some of the important activities broadly include: * Development of training programmes on fire safety, material handling, road safety and a host of other related subjects. These programmes are aimed at supervisory and managerial personnel. * Providing safety and risk analysis services, including identifying and evaluating exposures to property damage, and other accident hazards affecting an organisation.
Offering risk management service aimed at identifying risks to which manufacturing and business houses are exposed, suggesting appropriate risk control and transfer strategies. This also includes analysis of total insurance portfolio from coverage and adequacy point of view. In providing these services, the LPA works hand-in-hand with other professional organizations like the Bombay Fire Brigade and Salvage Corps, in their efforts to reduce and prevent fire accidents in industrial sector as well as at homes. Undertaking fire protection system inspection and certification as per Tariff Advisory Committee (TAC) norms. Publication of manuals, handbooks, guidelines, periodical newsletter for disseminating information on safety through its quarterly journals-Loss Prevention News and Road Safety Digest. LPA also provides advice on safety through posters, bulletins, leaflets, data sheets etc.
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