Detariffing of the Indian insurance industry has steered itself on to a completely different trajectory, where the market has been transformed overnight from a sellers' market to a buyers' market. Since then, the insurance industry has been constantly evolving, becoming more sophisticated with the passage of time. The transformation was initiated in 1999 with the liberalization of the industry, which threw openthe government-operated industry to private competition and foreign minority ownership.
But it was the brave new post-detariffing world that was the real game changer, where private insurers challenged the status quo with new products and distribution channels. Yes, the incumbent insurers still dominated the market and continue to do so by virtue of their strong capitalization, but there is no looking back now for the industry. The benefits of detariffing are manifold, both for the customers and the industry.
Competition has been intense and is set to intensify in the future with many more insurance joint ventures set to enter the market. The resultant beneficiary of this competition has been the customer who has been able to shop around in the wake of the heavy discounting in the industry. This was unthinkable in earlier days when a sellers' market dispensed the products, leaving the hapless consumer with no choice.
The removal of tariffs also was a major driver in product innovation, and gave customers a lot more choice of products. Pre-detariffing, tariffs in motor, fire and engineering were a stumbling block for insurers in offering differential solutions to customers, which in turn placed a cap on creativity and innovation. Today, insurers have the freedom to offer differential pricing, a different set of premium rates based on their perception of risks and segment customers by the nature of their risk. At the same time, customers have been given the liberty to avail different kinds of covers in auto, fire, engineering, health and miscellaneous products. As prices are not uniform, customers have more room to negotiate for the best price in the market.
Competition has been a major driver towards service excellence and the customer couldn’t be happier in this regard. Moreover, with price no longer being the only differential to woo customers and clients, general insurance companies now look at improving both their customer service as well as the products offered.
The administered pricing regime of the pre-detariffing era has now given way to risk based pricing, wherein the premiums have moved from tariff based to risk based. The tariff based regime inhibited the development of risk based pricing, which is of fundamental importance for companies seeking profitable growth. Risk based pricing introduces a discipline and associated processes and controls that were not well developed within the general insurance companies under the tariff regime. The intent is to charge an appropriate price which reflects the risk insured, which is the key to providing sustainable services to meet customers’ needs. Today, actuaries are increasingly playing a crucial role in the industry by helping design new products, determining the appropriate premiums and implementing the necessary portfolio management controls. Their mathematical expertise, statistical knowledge and analytical skills are indispensable to insurers to help evaluate the long-term financial implications of their decisions.
The transition from the free pricing regime to risk based pricing has put an end to cross subsidization and today, each portfolio must stand on its own feet. Risks in the corporate/industrial segment are now individually assessed particularly in terms of their risk management, safety features and rated appropriately. Growth in this segment is driven by the insurer’s expertise and ability to assess and rate risks differentially.
When there was limited scope for product differentiation, insurers mainly distributed their products through intermediaries. The abolition of tariffs has been the precursor for the development for many alternate channels for distribution. Direct marketing has gained prominence including the path breaking online channel, which holds great promise from the insurer’s standpoint and has been an unending source of customer satisfaction.
In the final analysis, despite the many ramifications of detariffing, the industry is still in a nascent stage and constantly evolving. In the future, many expected changes such as higher FDI, increasing number of players in the market and additional regulatory changes by the Irda would be the catalysts for a further metamorphosis of the industry. The future holds many turbulent and exciting times for the Indian insurance industry.
