Detariffing of motor insurance and its impact on general insurance industry and Indian economy
2013
EPLM - 06
V Jagannath
Student ID-2226357
DE-TARIFFING OF MOTOR
INSURANCE – ITS IMPACT ON
GENERAL INSURANCE INDUSTRY
AND INDIAN ECONOMY
Abstract
Indian general insurance industry has encountered a radical change by being de-tariffed after 4 decades of tariff regime. Such a change did have a lot of impact on the premium growth, way of operation, profitability and loss ratios of the general insurance industry. This change fueled innovation in the general insurance industry which was deprived for past 4 decades. Boom in auto industry during last decade did prove to be a catalyst for motor insurance premium growth.
The general insurance industry has experienced two major changes namely liberalization and detariffing, there is another paradigm shift which is expected shortly is digitization. This report deals with the impact of de-tariffing and briefly throws a thought on expected future of general insurance industry.
2
Contents
1) Acronym
2) Introduction
3) History of General Insurance in India
4) Overview of general insurance industry globally
5) Overview on general insurance industry of India in detail
6) Emergence and role of TAC
7) Emergence and importance of IRDA
8) Brief discussion of Indian automobile industry and its relevance to GI industry
9) Brief discussion on motor insurance
10) Perspective on de-tariffing
11) Road map to de-tariffing of motor insurance
12) Analysis on impact of de-tariffing motor insurance to GI industry
a. Impact 1 – TP Pool – IMTPIP & Declined risk pool
b. Impact 2: Premium Ticket size
c. Impact 3: Loss Ratios
d. Impact 4: Profitability of Insurers
e. Impact 5: Motor Insurance growth vs GI industry growth vs Automobile industry growth f. Impact 6: Penetration of motor insurance against the vehicle population in the country g. Impact 7: Capital Infusion and FDI flow
h. Impact 8: Emergence of New products
13) De-tariffing of motor insurance and its impact on Indian economy
14) Brief discussion on future of GI in India
15) Conclusion
16) References
17) Methodology
3
Acronyms
GI – General Insurance
GII – General Insurance Industry
GDP – Gross Domestic Product
GWP – Gross Written Premium
NEP – Net Earned Premium
LR – Loss Ratio
TP – Third Party
CV TP – Commercial Vehicle Third Party
IMTPIP – Indian Motor Third Party Insurance Pool
MNC – Multi National Company
FDI – Foreign Direct Investment
NCB – No Claim Bonus
O/S – Out Standing
PTD – Permanent Total Disability
IMT – Indian Motor Tariff
IRDA – Insurance Regulatory and Development Authority
TAC – Tariff Advisory Committee
PVT – Private
PSU – Public Sector Units
OD – Own Damage
ACC – Average Claim Cost
JV – Joint Venture
EXP – Expenses
U/W – Underwriting
IBNR – Incurred But Not Reported
XOL – Excess of Loss
GCV – Goods Carrying Vehicle
PCV – Passenger carrying vehicle
CV – Commercial Vehicle
TW – Two wheeler
MV – Motor Vehicles
IDV – Insured Declared Value
ULR – Ultimate Loss Ratio
GIC – General Insurance Corporation
CTP – Compulsory Third Party
TPA – Third Party Administrator
WTO – World Trade Organization
MACT – Motor Act Claims Tribunal
TAT – Turn Around Time
RBI – Reserve Bank of India
US – United States
USD – United States Dollar
IT – Information Technology
UK – United Kingdom
NOP – Number of Policies
COR – Combined operating ratio
SIAM – Society of Indian
Automobile Manufacturers.
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Introduction
24th July 1991 Indian economy was liberalized. Since then, India has seen a steep growth in its economy. Liberalization has allowed Indians to see new facet of life style which was not the case earlier. Lot of Industries has gone through revolutionary changes since liberalization which has enabled the growth of the economy. Few industries can be named which has gone through a radical change since liberalization are Telecommunications, IT, Automobile, Insurance, Banking,
Education etc.
This has changed the mindset of the consumers in India and made them think globally and aspire a better life style as they are exposed to more information and knowledge across the globe.
Indian general insurance industry have come a full circle as shown in the illustration. After 4 decades of being in tariff regime and 3 decades of nationalization era, both liberalization and detariffing came as a paradigm shift to the industry.
Liberal for Foreign
Insurer till 1972 and post 2000 and Non tariffed before 1968 and after 2006
Tariffed since
1968 till 2006 and
Nationalised from
1973 to 2000
Insurance industry in India was de-tariffed from 1st Jan 2007 which has allowed general insurance industry to follow risk based pricing. Such a transformation of the industry has fueled innovation which was earlier deprived by tariff regime.
5
History of General Insurance in India
Beginning
•1850 1st general insurance company named Triton Insurance Company was established in Kolkata.
•1907 Indian Mercantile Insurance company was established which transacted in all class of general insurance business
Insurance Act
•In 1938 insurance act was enacted to formulate and regulate insurance companies.
GIC
•1950 General Insurance Council a wing of insurance association of India was established. •TheGeneral Insurance Council created code of conduct to ensure fair conduct and sound business practice in general insurance
TAC
•Tariff committee established in 1950 as rate maker for GI Industry under GIC.
•1968 TAC was established and made an autonomous body as rate maker and decider of policy terms and conditions.
Nationalization
•1971 GIC was incorporated
•1972 Nationalisation Act of general Insurance enacted
•More than 107 General insurers in India were combined together and 4 general insurance companies were formed
•1973 Four PSU general insurers were formed (National Insurance co Ltd, New India
Assurance company Ltd, Oriental Insurance company Ltd and United india general insurance co ltd) with a holding company as General Insurance Corporation
Liberalization
•1991 India was liberalised in accordance with WTO agreement
•1993 Malhotra committee established to understand the way forward of General
Insurance in liberalised economy.
•1994 Malhotra committee report recommends establishment of a regulator and gradual phasing out of TAC.
•1999 IRDA Act enacted and IRDA came into existance
•2000 Private insurers were provided licence to establish insurance offices in India with a maximum limit of 26% share allowed to be held by foreign insurer.
De-tariffing
•1994 Marine Insurance was de-tariffed in accordance to the recomendation of
Malhotra committee as pilot project.
•1st Jan 2007 all lines of general insurance was de-tariffed except CV TP insurance and
Terrorism cover for fire and other lines of insurance
•From 1st April 2009 policy terms and conditions were also de-tariffed.
.
6
Overview of general insurance industry globally
Non-life premium growth continued to accelerate moderately, growing by 2.6% in 2012 against the growth of 1.9% in 2011. Emerging markets registered a strong growth of 8.6% in 2012 against 8.1% in 2011. Advanced markets grew by 1.5% in 2012 as against 0.9% in 2011. The growth was fueled by price increase in some of the developed markets, particularly in Asia.
The penetration level of US market was consistent while there was volatility in penetration level of UK which can be partially attributed to Euro crisis. However the penetration increase in emerging markets has not made enough dent in the world penetration level to stop the decline caused by developed markets. Asian penetration level has also remained more or less constant for past 5 to 6 years though there has been strong growth provided by India and China.
The penetration level of few developed and emerging markets is given below for understanding the trend.
Penetration %
Penetration against GDP
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2001
India
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.56% 0.67% 0.62% 0.65% 0.61% 0.60% 0.60% 0.60% 0.60% 0.71% 0.70% 0.78%
China 0.86% 0.96% 1.03% 1.05% 0.92% 1.00% 1.10% 1.00% 1.10% 1.30% 1.20% 1.26%
Brazil 1.78% 1.74% 1.68% 1.63% 1.68% 1.60% 1.60% 1.60% 1.50% 1.50% 1.50% 1.66%
US
4.57% 4.98% 5.23% 5.14% 5.01% 4.80% 4.70% 4.60% 4.50% 4.50% 4.50% 4.52%
UK
3.45% 4.56% 4.75% 3.68% 3.55% 3.40% 3.00% 2.90% 3.00% 2.95% 3.10% 2.84%
Japan 2.21% 2.22% 2.20% 2.25% 2.22% 2.20% 2.10% 2.20% 2.10% 2.10% 2.20% 2.27%
SA
2.78% 2.86% 2.92% 2.95% 3.03% 3.00% 2.80% 2.90% 2.90% 2.80% 2.70% 2.60%
World 3.15% 3.38% 3.48% 3.43% 3.18% 3.00% 3.10% 2.90% 3.00% 2.90% 2.80% 2.81%
Asia
1.77% 1.79% 1.67% 1.60% 1.60% 1.50% 1.60% 1.60% 1.60% 1.64%
While the world general insurance penetration has been declining, the general insurance density has been consistently increasing. There has been significant contribution from Asia in terms of increase in density. This is due to increase in general insurance density in two of world’s most populous countries India and China, incidentally both being in Asia. As seen earlier like penetration, the insurance density has also been volatile in UK. US has been stable for a long time and shown a growth from 2011 to 2012.
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The insurance densities of few emerging and developed economies are provided below for understanding. Density in USD
USD
2500
2000
1500
1000
500
0
1
2
3
4
5
6
7
8
9
10
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
India
3.5
4
4.4
5.2
6.2
6.2
6.7
8.7
10
10.5
China
11.2
12.9
15.8
19.4
14.7
19.3
40
52.9
64
76
Brazil
46.8
55.2
72.1
88.4
106.9
129.1
123.8
157.7
189
188.7
US
1980
2062.6
2122
2134.2 2164.4 2177.4 2107.3 2127.2
2130
2239.2
UK
1441.4
1318
1311.9 1327.1 1383.2 1275.7 1051.2 1060.2
1188
1094.4
768
830.8
790.4
760.4
736
829.2
840.4
917.4
1031
1024.9
SA
107.4
141
156.2
160.2
159.5
163.6
163.9
200.1
215
198.6
World
202.5
220
219
224.2
249.6
264.2
253.9
263
283
283.1
Asia
43.3
47.1
48.3
50.4
54.1
60.4
62.8
73.5
85
91.9
GI Density (USD)
Country
Japan
Overview on general insurance industry of India in detail
General insurance in India has been growing consistently in all terms GWP, Penetration and density. GWP in India has grown by 458% when compared between 2001 and 2012, while the penetration has grown by just 39% and insurance density showed an impressive growth of 338% between same time periods. However, to achieve the average of insurance penetration and density as that of Asia or the world is quite a long way to go.
GWP (In crores)
Rs in Crores
80000
60000
40000
20000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GWP (In crores) 12383 15237 15595 17481 20360 24905 27824 30352 34620 42576 52876 69047
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The growth in general insurance premium has been in all the portfolios. Even though the GWP has been growing at such a strong pace, motor insurance has increased its ratio to total general insurance GWP. This growth of motor insurance is fueled by the exemplary growth provided by automobile industry and a large increase in premium for CTP in India. The proportion of various segments of general insurance to the GWP and the growth of those segments are given below for better understanding.
Rs in crores
Segment wise Premium
35000
30000
25000
20000
15000
10000
5000
0
Engineeri
Motor ng Health
Aviation
Liability
Personal
Accident
All
Others
18407
11245
466
1023
1132
6009
2258
24242
13212
482
1228
1373
7049
2446
29777
15341
469
1358
1602
8397
Fire
Marine
2011
4636
2533
1904
2012
5405
2871
2013
6637
3020
Segment wise proportion to GWP
12%
12%
2%
13%
2% 2%
1% 2%
1% 2%
2%
1%
10%
9%
10%
4%
5%
5%
Fire
4%
4%
4%
Marine
Engineering
Motor
Health
Aviation
22% 23% 24%
Liability
39%
42%
43%
Personal Accident
All Others
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The good news for the general insurance industry is that out of 9 segments 6 segments have managed double digit growth and as usual led by motor insurance with 23% growth with a 43% share in entire GI industry. The next biggest segment for general insurance industry is health which contributes around 22% of entire GI portfolio.
While there has been growth in most of the GI portfolios, the loss ratio’s which include IBNR and XOL has had varied experience. Fire which has been traditionally a profit making portfolio has had its loss ratio increasing consistently especially due to falling rates of fire premium. On the contrary health portfolio has shown a consistent reduction in its loss ratios during last 3 years due to increase in retail health portfolio which is profitable when compared to group health portfolios. Marine and motor has been volatile and the LR has increased between 2010 and 2012.
TP losses played the spoilt sport in increase of losses in Motor portfolio. All other segments together have been the most profitable portfolios in GI industry with loss ratios consistently reducing even though they are already on the lower side when compared to other major portfolios like Motor and health.
Segment wise Loss Ratios comparison
120%
Loss Ratios
100%
80%
60%
40%
20%
0%
Fire
Health
Marine
Motor
Others
2010
80%
111%
78%
85%
57%
2011
86%
100%
90%
103%
56%
2012
97%
94%
83%
95%
54%
The GI Industry has been relying on the investment income as they have been making U/W loss consistently during last 5 years. Though the loss ratio has been hovering around 80% during the last 5 years, the expense ratio has seen a huge fall during last year by around 5%. But as the exposure has been increasing during last 5 years due to the growth experienced by GI industry, the reserve for unexpired risk has also increased. The U/W loss has decreased by almost 9% between 2011 and 2012. The U/W loss decreased when the earned premium and exposure increased. This is a good news to the industry as it shows U/W has been attaining certain level of prudence. This achievement could be attributed to risk based U/W adopted by the industry post de-tariffing avoiding the cross subsidization of profitable portfolio to loss making portfolio during tariff regime. Currently only the CTP rates in motor insurance continue to be tariffed, yet IRDA has
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taken measures to increase the CTP rates to keep the losses under check. As the GI industry adopted risk based pricing the profitability of the industry is poised to grow in near future.
The details with regard to profitability for past 5 years of the industry are given below for better understanding. Profitability Analysis
Year
Rs in lakhs
2012
2011
2010
2009
2008
NEP
4445100
3493281
2807891
2441145
2102130
Incurred claims (Net)
3499785
2951404
2227448
1971695
1637112
78.73%
84.49%
79.33%
80.77%
77.88%
1320660
1206421
966934
845382
681584
Exp ratio
29.71%
34.54%
34.44%
34.63%
32.42%
Increase in reserve for unexpired Risk
506341
329808
207874
156445
173282
Reserve for unexpired risk ratio
11.39%
9.44%
7.40%
6.41%
8.24%
U/W profit or Loss
-881686
-994352
-594365
-532377
-389848
U/W profit or Loss Ratio
-19.80%
-28.50%
-21.20%
-21.80%
-18.50%
Gross Investment Income
950791
938183
768156
589098
698956
Other income less other outgo
-39635
-32304
-23316
-3814
-14088
Profit before tax
29470
-88473
150475
52907
295020
Loss Ratio
Commission, Exp of management
Unlike developed countries there are restrictions for foreign insurers to set up offices in India.
Foreign insurers have to enter into JV with any of the Indian entity in ratio of 26%:74% to set up office in India. From 2000 when private insurers started doing business in India they have consistently gained share in the Industry.
Emergence of private insurers in India has helped Indian GI industry to improve the service levels. The motor insurance has seen a tremendous decrease in the TAT on settlement of motor
OD claims. Most of the OD claims in motor are being settled on a cashless basis by private insurers. Even the settlement of Motor TP claims has seen a lot of improvement after the MACT has been set up and claims settled through lok-adalats as well.
General insurance industry has expanded to a great extent in India. This is clear from the fact that the GI GWP has grown from mere 2279 crores in 1989-90 to 69046 crores in the year 2012 to
13. The tariff regime was in existence from the year 1968 when TAC was established till the year
2006 when de-tariffing was done for all the products. However, the de-tariffing in whole, which means change of wordings was allowed only in the year 2009 by IRDA. This has put the onus on all the insurance companies to have a good underwriting team who can manage the risk and price them accordingly. De-tariffing has necessitated insurers in India to have a prudent underwriting set up to continue to make proper underwriting decisions based on the risks offered to be insured.
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Post de-tariffing the role of TAC has changed. Instead of being a rate maker which TAC was during tariff regime, it started maintaining data of the industry and make suggestions to the insurance companies and IRDA with regard to the trend of general insurance industry in India.
Once the insurance industry was liberalized the private insurers started gaining share consistently as against PSU’s who were operating for past 4 decades. Private insurers were growing at a faster pace than the PSU’s. The GWP comparison and their ratios and growth percentages are given below for better understanding.
Ratio between PVT and PSU in %
Premium distribution between PVT and PSU companies
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 to to to to to to to to to to to to to 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Pvt (Rs in Crores)
7.13 465.7 1316. 2257. 3507 5362. 8646. 10992 12321 13977 17425 22315 29653
PSU (Rs in Crores) 9799. 11917 13920 13337 13973 14997 16259 16832 18031 20643 25152 30561 39393
Growth of Pvt companies vs PSU's
200%
Growth %
150%
100%
50%
0%
-50%
2002
to
2003
2003 to 2004
2004 to 2005
2005 to 2006
2006 to 2007
2007 to 2008
2008 to 2009
2009 to 2010
2010 to 2011
2011 to 2012
2012 to 2013
PSU
17%
-4%
5%
7%
8%
4%
7%
14%
22%
22%
29%
PVT
183%
72%
55%
53%
61%
27%
12%
13%
25%
28%
33%
De-tariffing of general insurance also saw the emergence of TP pool. The entire motor CV TP premium would be pooled by the GIC who was the custodian of the TP pool and the TP loss was met by the pool instead of insurance companies. This was also discontinued by IRDA from 31 st march 2012 and started a Declined risk pool which would take only those CV TP policies which
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are declared as declined risk by the general insurers and the risk is being avoided by them. These
TP risk pools were created with a view that there are no TP risks which are avoided by the industry and all the vehicle owners get the TP insurance cover. As the TP premium continues to be tariffed in India even now, the TP risk pool would allow the insurers to join together and share the loss on the basis of the market share that they have in the industry.
De-tariffing of policy wordings also resulted in introduction of lot of new products in Motor
Insurance which the industry was deprived for a very long time during tariff regime. There were lots of innovative products introduced by various insurers. This has created awareness in the minds of Indian consumer and they have started understanding the insurance contracts before they are entered into. Most of these products are already there in the western markets and they have started finding ways into India post de-tariffing.
In terms of distribution of general insurance products Individual agents have been the largest contributor of premium and no of policies traditionally in India. The same continues to be true even now both, in terms of number of policies sourced and the GWP sourced by them. The most interesting factor about 2011 – 2012 is that the no of policies sourced by most of the distribution channels have come down and yet the premium sourced has gone up. This shows that the average ticket size of the products sourced by various channels have gone up. Only in case of corporate agents and Banks both number of policies sourced and the GWP sourced have declined. The reason of such decline is that both these channels are contributing more towards non motor premiums.
It is also striking that the general trend of no of policies sourced has come down from most of the distribution channels. Though the general insurance industry is growing in terms of GWP the actual distribution does not seem to have happened. It’s very clear that the price hardening is the reason for growth of general insurance industry rather than a organic growth which is expected.
Distribution trend for past 3 years is given below for better understanding.
60000
2011 - 2012
50000
2010 - 2011
40000
2009 - 2010
30000
20000
10000
0
Policies GWP Policies GWP Policies GWP Policies GWP Policies GWP Policies GWP Policies GWP
(in
(In
(in
(In
(in
(In
(in
(In
(in
(In
(in
(In
(in
(In
'000) crores) '000) crores) '000) crores) '000) crores) '000) crores) '000) crores) '000) crores)
Individual
Agents
Corporate
Agents
Banks
Brokers
Direct
Business
Referal
Arrangements
Others
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Emergence and Role of Tariff Advisory Committee
In 1950 the Insurance act 1938 was amended to form a Tariff committee. The Tariff Committee came under the supervision of General insurance council. From 1950 to 1968 the Tariff committee was deciding the rates and all the general insurance companies were obligated to follow the rates decided by Tariff Committee.
In 1968 Insurance Act 1938 was further amended and a statutory body was formed which was called as Tariff Advisory committee. It was the Tariff Advisory committee which was deciding the rates for various products and the terms and conditions of the acceptance of the risk at the specified rate. Only TAC had the right to create, Amend or Modify the rate or the terms and conditions of various products. The introduction of TAC was seen as an independent, Impartial and scientifically driven body for rate making.
After the nationalization of general insurance in 1972 the TAC was governed by the same chairman of GIC. This was widely criticized in Malhotra committee report, as all the members of
TAC were nominated by GIC only. Malhotra committee report also pointed out that the rates decided by TAC did not always reflect the market price. After the 1988 amendment of rates of
Motor CTP, the liability under the third party cover became unlimited and yet the rates were not revised due to political pressure from transport association.
By 1994 the Malhotra committee report also suggested to delink TAC from General Insurance
Council and also recommended for gradual phasing out of TAC with the exception of few areas.
Thus after the emergence of IRDA in 1999 and liberalization of insurance industry, the TAC was set to be abolished with effect from 1st Jan 2006. However, finally the detariffing took effect from 1st Jan 2007 for all products in India and the TAC was abolished.
Then the same was reformed as Insurance Information Bureau which became the data keeper for general insurance industry. Knowing that the Insurance is a data intensive industry, where all management decisions including rates were to be taken based on the data. The better the quality of data the better would be the decision of the managements. Thus, to provide all the stakeholders with accurate, timely and reliable insurance data for prudent underwriting the IIB was formed.
Emergence and Importance of IRDA
In 1994 after the Malhotra committee had issued the report, changes in insurance industry was imminent. IRDA (Insurance Regulatory and Development Authority) was formed to monitor and develop the insurance business in India by passing of Insurance Regulatory and Development
Authority ACT 1999.
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One of the important reasons for creating IRDA was to liberalize the insurance industry. IRDA would be regulating all the parts of insurance business in India. Life insurance, General
Insurance and Re-insurance would come under the purview of the regulator.
As soon as IRDA was formed in 2000, the regulator started issuing licenses to private insurers to set up offices in India. Private insurers were allowed to have foreign partners with a 26% share.
Since then more than 50 insurance companies have emerged in both life and general insurance space put together in India. However, there have been no taker for reinsurance space in India as the reinsurance is even now majorly dependent on general insurance and the average retention by insurance companies are 85%. The compulsory cession of 20% by all general insurers in India with GIC is also mandated by IRDA with a view to maximize the retention and reduce outflow of foreign currency by way of reinsurance premium.
IRDA also regulates and controls the rates and the policy terms and conditions. Every product sold by any insurer requires an approval from the regulator. IRDA conducts periodical audits with the insurance companies to understand the compliance of all regulations laid down by the regulator. IRDA regulates the investments of the insurance companies as well. The investments and the proportion that can be invested on a specific portfolio by the insurer are prescribed by IRDA.
IRDA makes sure that the interests of all the policy holders are protected and the solvency margins are properly maintained by the insurance companies.
One area where IRDA made a huge difference was in distribution of insurance products. IRDA made it compulsory for anyone to distribute insurance products to be licensed by the regulator.
Only licensed agents, Brokers, corporate agents, Banks and micro finance companies can distribute insurance products with due approvals from the regulator. This ensured that the insurance customers are not misled and someone who sells the insurance products is well informed about them. IRDA also made it mandatory for all the insurance companies to have a proportion of rural business in their portfolio so as to make sure that the insurance reaches the rural population as well and they continue to be affordable.
IRDA also mandated the surveyors to be licensed by the regulator for being eligible to assess losses. This made sure that the surveyors are following the proper process while assessing the loss and they can be held accountable for their actions. IRDA also regulates the TPA’s for settling health claims. This has ensured that the health insurance customers get timely service and their claims are addressed immediately.
As suggested by Malhotra committee, IRDA also worked on phasing out TAC and de-tariffed the general insurance products for the rates to be controlled by market forces. This move enabled the Indian general insurers to follow risk based pricing. De-tariffing also enabled a lot of new products available in developed markets to be marketed in India and fueled innovation in insurance industry.
15
Brief discussion on Indian Automobile industry and its relevance to GI industry
Automobile industry has been the integral part of the economic growth in India. The growth in automobile industry has been at its peak during the last decade. The sales of vehicles have doubled between 2005 and 2012. The industry contributes around 7% to India GDP and expected to cross 10% by 2016. As per ministry of road transport 141.8 million vehicles are on road including TW by 2011 out of which TW constitutes 71.8% while passenger car constitutes
13.6% and all others put together constitutes the rest of 14.6%.
India automobile industry grew at a compounded annual growth rate of 9.9% in terms of registered vehicles between 2001 and 2011.
Vehicle population in millions Vehicle population (In Millions)
150
100
50
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
Vehicle population (In Millions) 55
58.9
67
72.7 81.5 89.6 96.7 105.3 115 127.7 141.8
Motorization in India as on 2011 is 117 per 1000 people. Out of this 76 are TW and 13 are passenger cars. Rest is commercial vehicles. In developed countries the passenger cars motorization is above 400 and in Japan it is as high as 617 per 1000 persons.
Motor insurance contributing to 45% GWP of the entire GI industry has a lot of dependency on automobile industry. In India third party insurance is compulsory for any vehicle that runs on the road as per Motor Vehicles Act 1988. Thus the growth of automobile industry during last decade has been contributing to the growth of GI industry as well to a great extent.
Though as per the Ministry of road transportation 142 million vehicles are registered and plying on the road the number of motor policies issued in the year 2013 is only 63.67 million policies. If we compare it apple to apple, in the year 2011 the number of policies issued is only 43.93 million. This means only 1/3rd of the vehicles registered are insured and rest are plying uninsured. Considering the fact that the automobile industry is facing a downward trend during 2013, insurers can concentrate on the penetration of motor policies against the vehicle population and increase Motor GWP. As India has the policy of CTP, it is possible if the distribution is strengthened by the insurance companies.
16
A new trend has been started in India during last decade where auto manufacturers have started to directly negotiate with the insurance companies and creating their preferred list of insurers where they would have negotiated some favorable terms for their customers both in terms of pricing (premium) and in terms of claim settlement. Such negotiation in premium has been having a direct impact on the on road price of the vehicle sold and this factor is utilized by the auto manufacturers for running free insurance schemes and other schemes to compete in the competitive automobile market. Auto manufacturers have started showing interest in insurance as they have understood that the body shop revenues are directly related to insurance. Insurance has also provided them a stream of consistent revenue in terms of commission on policy issued.
Thus the auto manufacturers are becoming more and more sensitive to insurance and working with various insurers to create synergy between both the industries. Insurance works on the law of large numbers and insurers understood that the best channel to be tapped for motor insurance would be the manufacturer themselves. This would create a new channel of distribution for insurance companies and a good source of revenue for auto manufacturers.
Brief discussion on Motor Insurance
Motor Insurance is the one largest portfolio for general insurance industry contributing 43% of
GI industry GWP. Motor Insurance has two parts in it. One is Own Damage and another is Third
Party.
Insurance industry was under tariff regime from 1968 to 2006. Thus the premium was charged on the basis of the mentioned tariff rates on Indian Motor Tariff prescribed by Tariff Advisory committee a statutory body governed by General Insurance Council. From 1 Jan 2007 the motor insurance was de-tariffed by IRDA only for the rate and not the terms of the policy. IRDA also allowed de-tariffing of policy wordings from 1st Apr 2009 enabling various new products to be launched in motor insurance as discussed earlier. The de-tariffing happened only for the own damage part of the premium to be charged and TP continues to be tariffed by IRDA, considering the sensitivity of the portfolio.
Perspective on De-tariffing
India has been under tariff regime for past 4 decades. GI industry was nationalized in 1972 and both TAC and the Insurer were reporting into government. PSU’s did not consider it important to maintain proper data and hence TAC was also deprived of data to take any informed decision on rates backed with data. Hence the rates prescribed by TAC were derived on an adhoc manner.
Generally the rates during tariff regime would be higher as the case was in other countries and when the de-tariffing happens the prices fall due to competition. However in India the rates were
17
very low during tariff regime. The motor rates were between 2 and 3 percent while the rates in developed markets were 8 percent. The third party rates for motor insurance were also very low and both due to lack of data and due to political pressure put by transport associations the prices were continued to be very low in India even though the liability was made unlimited for third party life or permanent disability, though property damage liability was limited under Motor
Vehicles Act 1988. Hence, Motor OD premium was cross subsidizing the TP loss for a very long time. The Malhotra committee had recommended for a periodical phasing out of TAC in their report in
1994. The Rangarajan committee recommended to de-tariff the Motor OD portion and to keep the TP portion tariffed, as insurers were avoiding loss making portfolios like TP only policies.
Hence such TP risks might go uninsured. Rangarajan committee also recommended to quarantine motor TP portfolio by all the insurers and asses the TP loss. This resulted in IRDA creating a TP pool under the supervision of GIC, where all the general insurers in India would seed their CV TP premium with the pool and the pool would make the payment for TP claims.
During tariff regime there was a lot of rigidity in rates resulting in lack of innovation and customers with good risk were also asked to pay higher premium as per the rates prescribed by the TAC. Whatever premium was coming according to the rate prescribed by the TAC only should be payed and the premium would be equal to the customers who were having the bad risk in the same category. Thus good risks were cross subsidizing the bad risk in the same class or across the different class of insurance. As the industry was nationalized and tariffed the PSU’s were underwriting the risk without looking at the profitability.
In 1999 once the IRDA came into existence the insurance industry was liberalized and private insurers were allowed to enter the industry. But as the industry was tariffed, they were not able to do much of value add in terms of product innovation. But the services of the industry had improved to a great extent and the private insurers were also lobbying strongly with the regulator to detariff. Private insurers also had good systems back up which would provide quality data for analysis. IRDA considered the way forward would be de-tariffing for the industry and formed a committee headed by SV Mony to draw the road map for de-tariffing the motor insurance. SV Mony committee recommended for de-tariffing but with some rating factors kept as base so that the pricing can work around the same like loading and discounting. Else the committee cautioned that there can be a collapse of rational underwriting. The regulator also felt the need for risk based pricing and product innovation which was possible only by de-tariffing.
18
Road map to de-tariffing of motor insurance
After Malhotra committee recommended phasing out TAC gradually in their report, Marine insurance was de-tariffed in 1994. The rate of marine insurance crashed and loss ratio increased.
Having this in mind IRDA decided to de-tariff on a phased manner which would give enough time to consolidate and sustain the same by the market and insurance companies.
Thus IRDA chalked down the plan and de-tariffed all class of general insurance which was still tariffed on 1st Jan 2007 except for Motor TP premium. The effect of de-tariffing was only in the rates to be charged and not on the policy terms and conditions. Further the policy terms and conditions was de-tariffed effective 1st APR 2009.
Under de-tariffed scenario the insurers can innovate new product and sell them based on the file and use method with IRDA. IRDA also created a TP pool in which all the insurer would seed the
CV TP premium and the loss would be shared on the basis of market share. This allowed the motor TP premium to remain tariffed and rest all de-tariffed.
Analysis on impact of de-tariffing motor insurance to GI industry
De-tariffing of general insurance was a paradigm shift to the industry after remaining tariffed for more than 4 decades. Hence, such changes always come with some impact. Impact of detariffing general insurance industry was felt in various manners which are being discussed below: Impact 1 – TP Pool – IMTPIP & Declined risk pool
De-tariffing did have one of the major impacts on the product portfolio which was not detariffed. The Rangarajan Committee had recommended to de-tariff the OD portion of motor insurance and also recommended to quarantine the TP premium and continue to keep the TP premium tariffed considering the sensitivity of the portfolio. TP insurance has been a challenge for the industry to handle in view of its tariffed nature and non availability of credible data. The
TP premium was not de-tariffed by IRDA considering the compulsory nature of the insurance and high losses which may lead the insurers to avoid the portfolio or charge exorbitant price which may result in vehicle plying on the road without insurance.
Till 2006 the motor TP premium was administered by the TAC through IMT. Historically the motor TP portfolio has been highly loss making for the general insurers in India. Motor TP insurance is mandatory in India under section 146 of motor vehicles act 1938. Motor TP policies have certain unique characteristics associated with the business. The TP portfolio is quite long tailed and it might take 7 to 8 years to mature. The MV ACT (Amendment) 1988 does not
19
impose any restriction on the liability amount of insurers on TP claims. The awards are extremely unpredictable and form precedence which might put the financial stability of an
Insurer in jeopardy. With transporters lobbying against the increase of TP premiums, it’s become extremely riskier and capital intensive for an insurer to carry out business in this portfolio.
To reconcile the unviability of this portfolio IRDA vide direction dated 4thdec 2006 had constituted the IMTPIP under the supervision of GIC. All the insurers except for specialized line insurers were directed to participate in the IMTPIP created for commercial vehicles exclusively and the other TP premium for such as private vehicles were continued to be underwritten outside the pool.
A declined risk pool was also considered by IRDA as being done in Malaysia. But considering the compulsory nature of the TP insurance and regulated price for the same, IRDA had thought of creating IMTPIP instead of Declined pool. All CV TP premiums were to be seeded in the pool by the insurers. The losses of the pool would be later divided among insurers according to the market share that they hold in order to ensure a level playing ground. But, this did not run for long as the loss reported were extremely high and the ULR computed made the insurance companies to infuse fresh capital to keep the pool solvent.
TP POOL LR DATA Without IBNR
Loss Ratio
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
2007 - 2008
2008 - 2009
2009 - 2010
Loss ratios as on 31/8/2010
126.66%
90.01%
30.48%
Ultimate loss ratios as computed by actuaries
172.30%
181.81%
216.32%
With such a high ULR estimated IRDA decided to dismantle the IMTPIP and introduce declined risk pool. They also simultaneously initiated their discussions with the transporter lobbyists to increase the TP premiums with support of the data generated by IMTPIP. This resulted in increase of TP premium 3 times in previous 3 years.
The interpretation of section 146 of MV ACT (Amendment) 1988 to the effect that an insurer cannot decline a TP insurance still remains. Considering the loss prone nature of the TP portfolio, pricing of TP premiums in commensurate with the risk was accepted by IRDA. Hence,
IRDA considered as long as the TP premium pricing is administered, an insurer should be given
20
an option to decline the risk. Under the amendment to insurance laws (amendment) bill 2008 which proposes the insurers to underwrite minimum percentage of motor third party risks, it was clear with this amendment the IMTPIP was not required in the current form. Thus, declined risk pool came into existence by 1st Apr 2012 as the IMTPIP was dismantled with effect from 31 st
Mar 2012. The loss generated by IMTPIP was to be taken care by the individual insurers who ever have accepted the risk.
All the insurance companies carrying out business in motor insurance should be part of declined risk pool. Insurance companies should provide their underwriting guidelines which would provide the risks that are declined by the insurer considering the pricing of the proposed risk which is administered. All such risk can be seeded with the declined risk pool which is administered by GIC. GIC would act as a reinsurer for all such declined risk which has been declared as declined risk by the insurance companies and the premium seeded with the declined risk pool.
Impact 2: Premium Ticket size
After 3 decades of PSU monopoly and close to 4 decades of tariffed regime, the liberalization and de-tariffing came as a relief to the insurers. The de-tariffing allowed the insurers to do risk based pricing and with competition around from private insurers the pricing of good risk was sure to decline and bad risk attracted increase in premium. Thus the OD premium part which was profitable for insurers immediately started showing a declining trend. As private car is the largest contributor to motor premium and the OD portion being the highest for the portfolio the decline in rate showed its highest effect on this portfolio.
As discussed earlier while the OD premium ticket size declined, TP premium ticket size started climbing up. OD portion formed more than 60% of motor premium until 2010 and was at 59% till 2012. But the increase in TP premium rates has resulted in reduction of OD premium in proportion to the total Motor premium generated by the industry. Thus by 2013 the proportion of
OD premium to total motor premium declined to 53%. This decline in the proportion of OD premium also resulted in increase in premium ticket size during 2012 to 2013. This can be witnessed in the premium ticket size trend analysis.
Initially from 2005 to 2006 the premium ticket size went up as a result of a boom in automobile industry and insurance industry remaining to be tariffed. The increase in new vehicles and high end vehicle sales in private car segment and a boom in infra industry also provided the increase to the premium ticket size of these two portfolios in particular as the average IDV increased due to new vehicles insurance. But post de-tariffing even though the auto industry was in boom the premium ticket size declined due to the impact of de-tariffing.
The CV portfolio did not show the kind of volatility which was showed by private car and special type of vehicles. The reason for the premium ticket size not suffering a decline in CV portfolio was due to parallel increase of TP premium while the OD part was declining in GCV and the OD portion being very low in PCV in comparison to other class of motor business while
21
TP premium increased considerably. The OD to TP ratio in both GCV and PCV are approximately 35:65 as of 2012.
In TW the premium ticket size is quite low yet the OD portion did suffer a decline due to detariffing but over all premium ticket size seemed to be intact or rather growing due to increase in
TP premium. The proportion of OD to TP in TW is almost 50:50. Thus increase of TP premium has compensated the loss of premium in OD portion due to de-tariffing.
The ticket size trend analysis is given below to understand the same.
Premium ticket size
Motor Premium ticket size trend
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Total Premium
2772
3467
3290
3202
3213
3316
3939
4469
TP
977
979
1230
1234
1193
1168
1624
1893
OD
1796
2487
2061
1968
2020
2147
2315
2576
Premium Ticket Size
Classwise premium ticket size trend
16000
14000
12000
10000
8000
6000
4000
2000
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Pvt
4982
6505
6401
5972
6179
6585
7128
7615
TW
552
588
659
637
665
691
735
779
GCV
8766
8612
9838
9296
8965
9564
12135
14672
PCV
5044
5140
6488
6280
6384
6377
8749
9965
Special Type
3973
5058
3916
4523
4216
4398
5469
5769
22
OD Premium Ticket Size Trend
7000
Premium Ticket Size
6000
5000
4000
3000
2000
1000
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Pvt
4069
5672
5058
4694
4933
5308
5716
6194
TW
321
354
314
295
325
352
369
386
GCV
4905
4968
4843
4382
4248
4668
4701
5221
PCV
2360
2385
2588
2558
2640
2752
3021
3307
Special Type
2771
4083
2952
3454
3238
3453
3903
3675
TP Premium Ticket Size Trend
Premium Ticket Size
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Pvt
912
834
1342
1278
1247
1277
1412
1421
TW
230
233
345
342
340
339
366
393
GCV
3861
3644
4995
4914
4717
4896
7434
9451
PCV
2684
2756
3900
3723
3744
3626
5728
6658
Special Type
1202
975
964
1069
979
945
1566
2094
23
Impact 3: Loss Ratios
The Loss ratios has been showing a declining trend over all. But this cannot be termed a 100% correct analysis as the TP loss ratios are calculated on Incurred claim basis while IBNR is not included and the loss ratios are not taken on the basis of ultimate loss ratios. Yet, the increase in
TP premium during last 3 years might provide some hope to the insurers for the TP loss ratio to decline. As the TP portfolio takes 7 to 8 years to mature and the TP premium having increased recently may not provide the exact picture and a correct result of the increased TP premium.
However, the OD loss ratio showed an increasing trend as soon as the de-tariffing happened. But, the same started showing a declining trend post 2009 yet, not coming to the level of 2005 – 2006 or 2007 – 2008. This can be attributed purely to de-tariffing as it has reduced the average OD rating in all class of business.
More accurate way of understanding the Loss ratios would have been to calculate the same on
NEP (Net Earned Premium) basis. But due to lack of NEP data portfolio wise (TP & OD), we have computed the same on GWP basis. Yet, this can allow us to understand the trend on a macro basis.
The Loss ratio analysis of incurred claim against the GWP is provided below for better understanding. LR based on GWP and Incurred Claim
250%
Loss Ratio
200%
150%
100%
50%
0%
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
LR OD
46%
26%
45%
58%
55%
54%
53%
51%
LR TP
192%
96%
126%
114%
98%
113%
90%
76%
Total LR
98%
46%
75%
80%
71%
75%
68%
62%
24
Impact 4: Profitability of Insurers
The motor loss ratio did show an increasing trend as soon as the de-tariffing happened. Though, it came to the same percentage as that of 2005 – 2006 in the year 2009 – 2010 and again increased. This shows the kind of volatility that has been encountered by de-tariffing the rating of motor insurance.
However, though motor insurance has been around 43% of the total GI portfolio, the loss ratios of motor insurance has always been higher than the industry loss ratios which means that the other lines of business continues to be more profitable than motor insurance. Though the LR of motor insurance has been higher and margin under strain, it is motor insurance which provides the necessary cash flow to the GI industry on a regular basis. With 43% share in GI industry, motor insurance is one portfolio which cannot be avoided. Considering that the motor loss ratios are higher than that of industry, which is majorly caused by TP losses needs to be set right. The only way to do it would be to follow risk based pricing which in long term can achieve the reduction of loss ratios.
GI industry has been marred with underwriting losses for a long time now. Though the industry has been having underwriting losses the investment income generated by the insurance companies has come for their rescue and allowed them to keep themselves afloat. With investment incomes slowing down due to the slowdown in global economic situation, the insurance industry have to be more careful to manage the risk efficiently and reduce the underwriting loss which can keep the insurers at least at break even. This would mean that there has to be more prudent underwriting which has to be done and the regulator has provided enough opportunity by de-tariffing.
Motor LR vs Industry LR on NEP
120%
Loss Ratio
100%
80%
60%
40%
20%
0%
2006 - 2007
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
Motor LR
85%
92%
89%
85%
103%
95%
Industry LR
74%
78%
81%
79%
84%
79%
25
Profitability Analysis
100.00%
80.00%
Ratios
60.00%
40.00%
20.00%
0.00%
-20.00%
-40.00%
2005 2006
2006 2007
2007
- 2008
2008
- 2009
2009
- 2010
2010
- 2011
2011
- 2012
Loss Ratio
83.03%
73.73%
77.88%
80.77%
79.33%
84.49%
78.73%
Exp ratio
37.54%
31.44%
32.42%
34.63%
34.44%
34.54%
29.71%
Reserve for unexpired risk ratio
6.06%
9.29%
8.24%
6.41%
7.40%
9.44%
11.39%
Investment income against NEP
40.00%
in %
35.00%
33.00%
24.00%
27.00%
27.00%
21.00%
U/W profit or Loss Ratio
-26.63% -14.46% -18.55% -21.81% -21.17% -28.46% -19.84%
Profit Before Tax Ratio
12.36%
20.00%
14.03%
2.17%
5.36%
-2.53%
0.66%
There is 10% volatility in the ACC between 2007 and 2013 and the frequency of the claim has also not changed much though there has been volatility during 2009 to 2012 before again settling down in 2013 at the same frequency as that of 2007 – 08. Barring “others” portfolio which is more of motor trade risk policies other portfolios has been fairly stable both in terms of ACC and frequency. Considering the frequency and ACC having only 10% volatility for past 5 years a reduction in premium can create a deep impact on profitability of that portfolio.
However, the decline in the OD premium has been compensated by an increase in the TP premium as seen earlier in the ticket size trend analysis the loss ratios of the insurance companies has not been affected much due to de-tariffing. Increase in penetration to the vehicle population which has been happening during last 5 years is also a reason for frequency remaining stable. If the NOP does not increase every year the frequency would increase which is evident from the below analysis. This situation was encountered in 2010 – 2011. The NOP in 2009 – 2010 dropped from 2008 to 2009 and this resulted in increase of claim frequency in 2010 – 2011.
Hence, with slowdown in auto industry there is a lot of probability that the NOP may not increase to the desired extent which inturn may increase the frequency. Higher frequency with constant claim cost of higher claim cost would result in increased loss ratios which would result
26
in strain of profitability of the industry. Hence it’s imperative now for GI industry to increase the
NOP and GWP which can keep the LR constant. Hence, if the NOP is not able to be increased due to the slowdown of auto industry the premium rates may harden to increase the premium for counter the increased LR due to increased frequency. Thus de-tariffing also provides opportunity to counter a slowdown situation as well by increasing the premium rates which is not possible during the tariff regime.
The growth of NOP, GWP and the frequency percentage has been provided below to understand the same. Last 5 years frequency and ACC has been given below for easy understanding.
NOP and GWP growth vs claim Frequency
Ratios
60%
50%
40%
30%
20%
10%
0%
-10%
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
2012 - 2013
NOP Growth
53%
7%
-4%
17%
27%
14%
GWP Growth
45%
5%
-4%
21%
51%
29%
Frequency
10%
10%
9%
12%
9%
10%
Frequency
Frequency
80%
70%
60%
50%
40%
30%
20%
10%
0%
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
2012 - 2013
Total
10%
10%
9%
12%
9%
10%
Pvt Car
17%
18%
20%
23%
21%
22%
TW
3%
3%
3%
4%
3%
3%
GCV
18%
18%
10%
25%
16%
16%
PCV
18%
17%
11%
23%
18%
16%
Special Type
5%
6%
4%
7%
7%
7%
Others
33%
59%
33%
44%
47%
72%
27
Average Claim Cost
Claim cost
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
2012 - 2013
Total
25539
26174
26331
21245
28559
27358
Pvt Car
20309
21567
19242
18791
22231
20816
TW
11645
11125
10428
9590
11871
12518
GCV
50894
55330
77961
34626
61784
57493
PCV
37642
34290
49960
25262
36395
39615
Special Type
55695
69639
76178
45616
45477
60076
Others
18622
6527
6152
18011
11166
23579
Impact 5: Motor Insurance growth Vs GI industry growth Vs Automobile industry growth
Motor GWP has been growing during the de-tariff regime. However, the motor insurance growth rate fell initially during 2007 to 2010 due to rate decrease in motor insurance and slowdown in economy. However, with automobile industry booming since 2010, the GI industry had also shifted its gear between 2010 and 2012. But the growth of Auto industry started declining from
2012 which also resulted in the slowdown in the growth of motor insurance while the industry continued to grow. This would mean that the other segments of GI have grown irrespective of the slowdown in the economic growth. This would also come as good news to the insurance industry as the loss ratio of motor insurance has been higher than the industry loss ratio traditionally as discussed earlier.
The reason for growth of motor insurance can be attributed to the increase in the TP premium and growth of automobile industry. Hence we can find from the below illustration that the motor insurance has witnessed a better growth between 2008 and 2012 while automobile industry was also growing at a rapid pace. The Motor insurance growth was not equivalent to that of automobile industry due to de-tariffing which has resulted in the reduction of premium rate.
However, the motor insurance grew at a faster pace in 2012 as the TP premium was increased though the automobile industry was witnessing a steep decline in their growth rate.
28
Motor OD Vs TP Growth chart
100%
Growth
80%
60%
40%
20%
0%
-20%
20062007
20072008
20082009
20092010
20102011
2011-201
2
20122013
Motor OD Growth
45%
26%
3%
-2%
25%
37%
21%
Motor TP growth
5%
92%
8%
-7%
15%
77%
55%
GII Growth vs Motor Insurance growth vs Auto industry growth
60%
50%
Growth
40%
30%
20%
10%
0%
-10%
20062007
20072008
20082009
2009-20
10
20102011
20112012
20122013
GII
22%
12%
9%
14%
23%
24%
31%
Motor
31%
45%
5%
-4%
21%
51%
35%
Automobile
14%
-5%
1%
26%
26%
12%
Motor TP has been growing at a greater pace than the Motor OD premium. This phenomenon can be purely attributed to de-tariffing of motor insurance. Reason being, the de-tariffing made the regulator to increase TP premium in 2007, 2011, 2012 and 2013 which resulted in the phenomenal growth of TP premium during those years which the illustration also suggests.
However, OD premium rate declined due to de-tariffing and hence the growth slowed down in the OD part pulling down the growth of entire Motor insurance GWP.
29
Impact 6: Penetration of motor insurance against the vehicle population in the country
The penetration of insurance among vehicle population has been growing consistently in all class of vehicles. This phenomenon may be attributed to de-tariffing but the same should also be attributed to liberalization as well. Liberalization has enabled the private insurers to set up office in India and these private insurers have unparalleled hunger for premium which has enabled in the increase in penetration of insurance among vehicle population.
Partially the increase in the penetration can also be attributed to the initiative of introducing TP pool and declined risk pool post dismantling of IMTPIP which has enabled insurers to accept the all class of TP risk. Hence, de-tariffing has also had an impact on the improvement in penetration of insurance among vehicle population. This was not possible without de-tariffing and liberalization. Penetration of insurance policies against vehicle population 80%
70%
Penetration
60%
50%
40%
30%
20%
10%
0%
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
Pvt Car
32%
43%
54%
55%
50%
52%
60%
TW
19%
20%
27%
27%
23%
25%
28%
GCV
47%
45%
55%
56%
53%
51%
69%
PCV and Special Type
26%
23%
33%
36%
31%
34%
36%
Total
23%
25%
33%
33%
29%
31%
35%
30
Impact 7: Capital Infusion and FDI flow
The below illustration clearly provides the comparison of insurance companies capital which is consistently increasing. During de-tariffing even PSU’s had to increase their capital. The increase in the capital post de-tariffing after 2007 has been climbing on a higher pace. This phenomenon can be attributed to de-tariffing as the premium rate declined and the loss ratios started climbing up. Such increase in loss resulted in insurance companies particularly private insurers required to increase capital for maintaining solvency margins while PSU’s has huge reserves to back them up for such eventualities.
The below illustration would clearly show the capital infusion of all the insurance companies who were operational on or before 2003.
Capital in crores
Equity Capital Infusion
3000
2500
2000
1500
1000
500
0
2003 2004 2005
2006 2007 2008
2009 2010 2011 2012
PSU Insurers (In Crores)
400
500
550
PVT Insurers (Entered on or before 2003) (In Crores)
883 1048.9 1048.9 1279.0 1400.8 1501.7 1725.4 2068.0 2246.4 2483.9
400
450
550
550
550
550
550
A comparison between insurance companies who started before de-tariffing and the companies who started after de-tariffing shows the increase in capital requirement for companies who started after de-tariffing. The capital infusion of private companies started after de-tariffing is almost equivalent to the private companies started before de-tariffing. While the GWP of the companies started before de-tariffing are 6 times more than that of the companies started after de-tariffing. This phenomenon may be fully attributed to de-tariffing of general insurance industry which has induced a cutthroat competition among all the general insurers resulting in reduction of rates.
Such reduction of rates has resulted in increase of loss which has put the solvency margin under strain and made the capital infusion necessary. Thus de-tariffing has made the insurance industry more capital intensive.
31
Capital in crores
Capital Infusion comparison during tariff and detariff regime
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
2003
PVT Insurers (Entered on or before 2003) (In Crores)
GWP (In Crores)
2004 2005 2006
2007 2008 2009 2010
2011 2012
883 1048.9 1048.9 1279.0 1400.8 1501.7 1725.4 2068.0 2246.4 2483.9
1195.2 2077.7 3132.5 4941.9 8132.5 10388 11722. 12819 15125. 18431.
PVT Insurers (Entered after detariffing) (In crores)
0
0
0
0
0
300 807.83 1092 1709.2 2376.7
GWP (In Crores)
0
0
0
0
0
10.29 358.89 1294.9 2299.2 3883.1
As de-tariffing has resulted in increase of capital, the FDI flow also increased as lot of foreign insurers has set up their offices in India in JV with an Indian partner. 8 multiline private insurers were in India before de-tariffing and 7 new multiline general insurance companies ventured in the industry post de-tariffing. Though it may not be right to attribute the fact of 7 general insurers starting their companies after de-tariffing only to de-tariffing of the industry, definitely it is one of the reasons for new insurers to show interest in the Indian market.
Considering the FDI flow being one of the important factor to control inflation in India and better our balance of payments, the general insurance industry has been contributing to it on a high note. With the new bill which is in the process to be passed to increase the FDI cap to 49% from 26%, the contribution of GI industry to FDI in India would increase multifold. Apart from this the general insurance business becoming more capital intensive would also result in increased FDI flow in India.
FDI FLOW (In Crores Rs)
FDI in crores Rs
1500
1000
500
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FDI FLOW (In Crores Rs) 175.76 175.76 246.21246.21 306.02 337.24439.61 621.72 782.3 927.18 1117.7
32
Impact 8: Emergence of New products
De-tariffing of motor insurance has allowed introduction of new products in India by the insurance companies. After 4 decades of tariff regime, de-tariffing enabled the insurance companies to introduce new add on products in India. The Indian customers were deprived of such innovative products during tariff regime. Currently there are various new products introduced by insurance companies. Some of such new products are as following:
1) Nil Depreciation (Most popular add on product. This cover protects the customer against the depreciation charged on the replacement or repair of the damaged part)
2) Consumables cover (A cover which will cover various consumables used during the repair of the vehicle)
3) Hydrostatic lock cover (A cover for extended loss due to water ingression into the engine) 4) Engine protector (A cover for extended loss to engine due to oil leakage because of under body damage)
5) Tyre cover (A cover to damages caused only to tyre without any damage to other part of vehicle – This is an exclusion under IMT)
6) Key Cover (A cover for high end vehicles where the cost of key is high and this comes into existence when the key is lost)
7) O/S Loan protector (A Cover which can protect the insured from the vehicle loan in case of death or a PTD)
8) Road Side Assiatance (A cover which can provide service to customer in case the vehicle is stranded any where due to accident or break down)
9) NCB protector (A cover which would protect the NCB even when a claim is araised in the policy)
10) Loss of baggage (A cover which would provide financial compensation if the baggage is lost while travelling in the vehicle)
11) Hospital cash cover ( Provides a fixed sum to the insured per day for the number of days hospitalized due to accident in the insured vehicle)
12) Mediclaim cover (Provides cover for the medical expenses incurred due to hospitalization in case of accident occurred while in insured vehicle)
13) Ambulance cover ( Provides compensation on ambulance charges which has occurred due to accident in insured vehicle)
Most of the new products introduced in motor insurance by various insurance companies have been listed down. The list may not be fully exhaustive as various companies have come up with various new products. This kind of value addition for customers was possible only due to detariffing. The private insurers with foreign JV partner have been quite quick in introducing various products which are prevalent in developed markets.
33
De-tariffing of motor insurance and its impact on Indian economy
Most of the Impact of de-tariffing has been already discussed in this report. One of the major impacts of de-tariffing to the economy was the FDI flow that it created. The flow was created by allowing PVT insurers set up offices in India and the other insurers who were already there had to increase their capital due to de-tariffing, thereby increasing the FDI flow in India.
Insurance jobs were one of those which were not attractive earlier. Later with liberalization happening and new MNC’s entering India, the Insurance industry started attracting lot of youth to pursue career in insurance. This enabled the industry to provide a huge employment opportunity in India for Indian youth.
Abolition of tariff regime and introduction of de-tariffing proved to be one of the motivator for foreign insurers to set up their offices in India. Tariff regime proved as a barrier to enter in
Indian insurance sector considering the lack of opportunity to follow risk based pricing. Thus the abolition of tariff regime lifted the barrier to enter Indian general insurance industry.
De-tariffing enabled general insurers to provide new and innovative products. These products enabled auto industry to utilize them to sell vehicles. The new coverage’s provided by insurers resulted in reduction of maintenance cost or easier maintenance for a vehicle owner in case of an accident. Vehicle manufacturers also tied up with the general insurance companies to offer specialized services to their customers like cashless facilities and the tied up insurers also provided them revenue in workshop by agreeing to pay their labor schedules and paint schedules. Such agreement enabled motor dealers to see margins in motor insurance which would not have been the case as a customer would ask for discounts on such schedules straining the margins of the auto dealers.
De-tariffing also enabled the vehicle manufacturers to run free insurance schemes to their customers due to the possibility of reduction in premium which resulted in reduction of on road price of the vehicle. Thus auto industry and the general insurance industry have become extremely interdependent with each other.
De-tariffing also enabled the increase in penetration of insurance against vehicle population which does satisfy a social cause. More number of vehicles plying on the road is now insured and thus enabling the affected party to be satisfied at least monetarily.
De-tariffing has got the industry to grow multifold and thus improving the insurance penetration against GDP in India as discussed earlier in the report.
34
Brief discussion on future of GI in India
Indian general insurance industry has been changing for better during last decade. First liberalized and yet without freedom in pricing and innovation liberalization would not be justified. Hence, de-tariffing was next most important thing to happen. Now that de-tariffing has happened and risk based pricing has become a reality and innovation and improved technical knowhow is there with foreign insurers setting up office in India, the stage is set for future. Some of the factors which can change the industry and some which has to be done to sustain profitability are discussed below.
Digitization
On Sep 16 2013 Insurance repository system was launched which would mean that policy storage will be digitalized in near future. It may not take too long for insurance policies also to be sold through digital platform. Already most of the insurers are offering online insurance policies and we can also see online aggregators available in the market. This distribution channel will grow to be one of the largest in future as the younger generation would be more tech savvy and rely on digital platform like smart phones and tablets rather than on individual agents as the digital platform would allow them to evaluate the options more judiciously. This would mean reduction in distribution cost for the insurance industry and hence the insurance industry might also dematize. With digital platform growing traditional distribution channels might find it difficult to sustain in future.
Rural market penetration
The penetration level in urban India being much higher than the rural India it may be difficult for insurance companies to grow and the premium rates might come under tremendous stress due to heavy competition in the GI industry in urban India. It may be prudent to figure out a strong channel of distribution which can allow tapping rural market. Probably the industry might look at developing nontraditional channels like grocery stores or a supermarket to distribute the pre underwritten products. This would require insurance industry to develop new underwriting methods, improved training and change in mindset. Insurance companies venturing in rural markets might look at better margins due to lack of competition which is prevailing in urban
India.
Claims Process
It would be prudent for insurance companies to look at innovative ways of settling claims in quickest manner. As digitization is imminent it would be very important for insurance companies to have a strong brand to survive in the industry. Certain process like immediate negotiated claim settlement without any repair documents for simple or small claims and on account payments for bigger claims in motor insurance would allow insurance companies not to depend on motor dealers or garages for cashless facilities and pay very high charges against labor and paint to save
35
such tie ups. This would make the life of insurance companies simpler and reduce average claim cost enabling profitability.
Improved penetration in vehicle population
The growth of auto industry is looking quite slow currently. It would be prudent in terms of insurance companies to improve penetration against vehicle population to increase premium income. For this they can look at joining hands with traffic department and ministry of transport departments and get the vehicles compulsorily insured at least for CTP which is mandatory as per the MV Act in India. As discussed earlier only around 1/3rd of the vehicle population is insured and hence this provides a lot of scope for improving penetration. As insurance works on law of large numbers, this might also affect the profitability in positive manner.
Operational excellence
As the insurance premium rates are driven by market forces and not much of control on claims cost, it would be imperative for the insurance industry to work closely on reducing management expenses and commission expenses to achieve profitability. Insurance companies can look at doing away with physical documents and go digital to save cost of maintaining the documents. It would also be possible for insurance industry to make all the retail lines insurance online which will reduce their cost of operation. However, quality check should not be compromised as it may lead to frauds and unwarranted drain by way of claim expenses.
After Liberalization and De-tariffing it is digitization which would be the next change for the industry to encounter. This would mean that the way of working of GI industry would change to a large extent and the distribution of GI products would take a new form. Unlike the first two changes digitization would be more of evolutionary in nature and the insurers who are not equipped with strong systems background would be difficult to cope with.
36
Conclusion
Digitization
De-Tariffing
Liberalization
IRDA was formed to make the insurance industry future ready. Only PSU’s were operating during nationalized era and premium rates were tariffed which was a barrier for innovation and risk based pricing. Both these objectives required insurance industry to be opened up. Thus insurance industry was liberalized and private insurers were allowed to set up offices in India.
However, without any freedom on pricing and new product innovation, private insurers were not able to contribute much to the industry except for process excellence. Hence, it was imperative to de-tariff insurance industry, which would give freedom of pricing and innovation.
The third change for the industry being digitization, it required skilled insurers with greater technical knowhow, hunger for innovation and global knowledge for understanding digitization and lead the industry without any trouble towards digitization. This requirement was taken care by liberalization as foreign insurers were allowed to enter India.
De-tariffing has provided the Indian GI industry a most wanted flexibility to gel with global market in terms of pricing and bringing new GI products to India from global market which can benefit the Indian consumers. De-tariffing has also allowed the Indian general insurance industry to price premium according to the risk that they are accepting which helps the industry to avoid penalizing good customers which was happening during tariff regime. De-tariffing has enabled the Indian GI industry to follow the fundamental principle of insurance which is more the risk more the premium and less the risk -less the premium.
From this report we have understood that loss ratio has not changed much due to de-tariffing.
De-tariffing has already showed that the industry which lacked new product introduction for 4 decades has already introduced more than 10 new products in motor insurance adopted from global markets in such a short span of time. We also understand that the penetration of motor insurance to vehicle population is improving fueling growth. De-tariffing has made foreign insurers interested in Indian market and fueled FDI flow which is of extreme importance at current juncture.
Hence, on a whole de-tariffing has proved to be a catalyst to take Indian GI industry to global standards, well poised for growth and able enough to cope with newly emerging trends.
37
References
1) Annual Reports of IRDA from 2001 to 2012. Reports down loaded from IRDA website.
Last visited on 13/10/2013 8.30 PM http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1 2) Motor portfolio reports of IIB from 2005 – 2006 to 2012 – 2013. Data taken for IIB website. Last visited on 16/08/2013 12.00 PM https://iib.gov.in/IRDA/homePageAction.do?method=loadHomePage 3) Swiss Re World Insurance Report from 2004 to 2012. Reports downloaded from Swiss
Re website. Last visited on 17/08/2013 10.00 AM http://www.swissre.com/sigma/ 4) Cap Gemini Report 2013. Downloaded from website. Last visited on 17/08/2013 10.30
AM.
http://www.capgemini.com/sites/default/files/resource/pdf/wir_2013_0.pdf
5) Notices, Circular and committee reports from IRDA portal. Downloaded from IRDA website. Last visited on 13/10/2013 8.30 PM http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid= 12 http://www.irda.gov.in/Defaulthome.aspx?page=H1 6) Road Transport Book 2011. Downloaded from ministry of road transportation website.
Last visited on 28/09/2013 5.15 PM http://morth.nic.in/index2.asp?slid=291&sublinkid=137&lang=1&key=road%20transport%2 0year%20book&n=1
7) Insurance History from IRDA portal. Last visited on 13/10/2013 8.30 PM. http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2 8) SIAM data for new vehicle sales from 2005 to 2012. Down loaded from SIAM website.
Last visited on 06/06/2013 10.00 AM. http://www.siamindia.com/scripts/domestic-sales-trend.aspx 9) Segment wise premium details from IRDA portal. Last visited on 13/10/2013 8.30 PM. http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_List.aspx?DF=SWDN&mid=3.2.13 38
10) OECD Report 2012 (Global Insurance market trends). Downloaded from website. Last visited on 14/09/2013 http://www.oecd.org/daf/fin/insurance/globalinsurancemarkettrends.htm 11) An analysis of evolution of insurance in India – Tapen Sinha (Institute technologic autonomo de mexico and university of Nottingham report) Downloaded from website.
Last visited on 27/09/2013. http://icpr.itam.mx/papers/IndiaChapter.pdf 12) GIMAR (Global Insurance Market Report) 2012 edition by International association of
Insurance Supervisors. Downloaded from Website.14/09/2013 10.00PM www.iaisweb.org/view/element_href.cfm?src=1/16517.pdf 13) Profitability analysis on Indian general insurance industry Report. Downloaded from website. Last visited on 17/08/2013 10.41 AM http://shodhganga.inflibnet.ac.in/bitstream/10603/2352/14/14_chapter%206.pdf 14) Ernst and Young Report on Motor Insurance. Downloaded from website. Last visited on
17/08/2013 11.05 AM. http://www.ey.com/Publication/vwLUAssets/Motor_Insurance/$FILE/Motor-Insurance.pdf 15) Insurance Act 1938. Downloaded from IRDA website. Last visited on 13/10/2013. http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=ACT&mid=4.1 16) Growth of Indian insurance industry and determinants of solvency report by subir sen,
TERI University. Downloaded from website. Last visited on 15/09/2013 9.58 AM. http://www.oecd.org/daf/fin/49674941.pdf 17) Implication of Motor TP pool and Declined risk pool by anurag rastogi. Downloaded from website last visited on 16/08/2013 2.33 PM http://www.actuariesindia.org/GI/TP%20Pool%20Implications%20CIGI%202011.pdf 18) Committee report on declined risk pool headed by Mr Ramprasad (Chairman)
Downloaded from IRDA portal last visited on 17/08/2013 11.38 AM http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid= 12.
19) Justice Rangarajan committee Report. Downloaded from IRDA portal. Last visited on
13/10/2013.
39
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid=
12
20) Report on distribution channel – Committee report from IRDA portal. Last visited on
13/10/2013
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid=
12
21) OICA Reports on world motor vehicle usage and manufacturing..Downloaded from website. Last visited on 28/09/2013 6.20 PM. http://www.oica.net/ 22) Automotive Mission Plan report by Ministry of heavy industries and public enterprises.
Downloaded from website. Last visited on 28/09/6.20 PM. http://www.siamindia.com/upload/amp.pdf Methodology
1) The penetration data extracted from Swiss Re world insurance reports and used for analysis. 2) The density data was extracted from Swiss Re world insurance reports and used for analysis. 3) GWP of GI Industry was extracted from IRDA annual report and used for analysis.
4) Segment wise GWP was extracted from IRDA portal for past 3 years and used to analyze the last 3 years segment wise share of GWP and its growth.
5) Segment wise loss ratios were extracted from the annual report for previous 3 years and used for analysis.
6) Profit before tax data for past 5 years was extracted from the IRDA annual report for past
5 years and used for analysis.
7) GWP of both PSU and PVT insurers were extracted from the IRDA annual report from
1999 to 2012 and used for analysis of the growth of and ratio of PSU and PVT insurers in the GI industry.
8) Last 3 years data on channel wise GWP and NOP was extracted from the annual report of
IRDA and used for analysis of distribution in GI industry.
9) The vehicle population details were extracted from the road transport book issued by ministry of road transportation and used for analysis on increase of vehicle population.
10) TP pool LR and ULR data was extracted from committee report on declined risk pool available in IRDA portal and used for analysis and understanding the mode of operation of TP pool and declined risk pool
40
11) The data from IIB portal on GWP premium, NOP issued, Number of incurred claims and
Incurred claim amount was extracted from 2005 – 2006 to 2012 – 2013 and used for extracting the various premium ticket size trend to understand the impact of de-tariffing both OD and TP premium. While computing premium ticket size the policies in others class was not considered as they are motor trade risk policies.
12) The same data of IIB was used to find ACC, Frequency, LR on GWP against incurred claims for OD and TP portfolio with overall motor portfolio.
13) Motor LR on NEP and Industry LR on NEP was extracted from IRDA annual report.
14) The profitability analysis data was also extracted from IRDA annual report and the same was analyzed.
15) Motor OD Vs TP GWP was extracted from the IIB data and the growth was analyzed.
16) Motor premium growth, Insurance industry growth and the auto industry growth was analysed with the IIB data for motor insurance growth, IRDA annual report data for GI industry growth and the SIAM data for auto industry growth was used. SIAM data did not have the 2012 – 2013 data and hence the same was left blank.
17) Penetration of insurance against vehicle population was done by using IIB data on NOP,
Road transport book for vehicle population till 2011 and SIAM data was used to add the
2012 sold vehicle to vehicle population and the penetration was analyzed.
18) Equity capital of PVT insurers, PSU’s and the FDI data was extracted from the annual report of IRDA and used for analysis of increase in FDI and requirement of excess capital was analysed.
19) Future of GI industry was based on the current trend and the recent article on policy digitalization and insurance repositories were used and extrapolated with own interpretation. 20) Apart from this the theoretical knowledge was obtained from reading various reports, articles, annual reports of IRDA and various committee reports.
21) While calculating the NOP penetration to Vehicle population, motor policies in others class was not considered as they are motor trade risk policies which cease to exist as soon as the vehicle is sold to a customer by the motor dealer.
EPLM - 06
V Jagannath
Student ID-2226357
DE-TARIFFING OF MOTOR
INSURANCE – ITS IMPACT ON
GENERAL INSURANCE INDUSTRY
AND INDIAN ECONOMY
Abstract
Indian general insurance industry has encountered a radical change by being de-tariffed after 4 decades of tariff regime. Such a change did have a lot of impact on the premium growth, way of operation, profitability and loss ratios of the general insurance industry. This change fueled innovation in the general insurance industry which was deprived for past 4 decades. Boom in auto industry during last decade did prove to be a catalyst for motor insurance premium growth.
The general insurance industry has experienced two major changes namely liberalization and detariffing, there is another paradigm shift which is expected shortly is digitization. This report deals with the impact of de-tariffing and briefly throws a thought on expected future of general insurance industry.
2
Contents
1) Acronym
2) Introduction
3) History of General Insurance in India
4) Overview of general insurance industry globally
5) Overview on general insurance industry of India in detail
6) Emergence and role of TAC
7) Emergence and importance of IRDA
8) Brief discussion of Indian automobile industry and its relevance to GI industry
9) Brief discussion on motor insurance
10) Perspective on de-tariffing
11) Road map to de-tariffing of motor insurance
12) Analysis on impact of de-tariffing motor insurance to GI industry
a. Impact 1 – TP Pool – IMTPIP & Declined risk pool
b. Impact 2: Premium Ticket size
c. Impact 3: Loss Ratios
d. Impact 4: Profitability of Insurers
e. Impact 5: Motor Insurance growth vs GI industry growth vs Automobile industry growth f. Impact 6: Penetration of motor insurance against the vehicle population in the country g. Impact 7: Capital Infusion and FDI flow
h. Impact 8: Emergence of New products
13) De-tariffing of motor insurance and its impact on Indian economy
14) Brief discussion on future of GI in India
15) Conclusion
16) References
17) Methodology
3
Acronyms
GI – General Insurance
GII – General Insurance Industry
GDP – Gross Domestic Product
GWP – Gross Written Premium
NEP – Net Earned Premium
LR – Loss Ratio
TP – Third Party
CV TP – Commercial Vehicle Third Party
IMTPIP – Indian Motor Third Party Insurance Pool
MNC – Multi National Company
FDI – Foreign Direct Investment
NCB – No Claim Bonus
O/S – Out Standing
PTD – Permanent Total Disability
IMT – Indian Motor Tariff
IRDA – Insurance Regulatory and Development Authority
TAC – Tariff Advisory Committee
PVT – Private
PSU – Public Sector Units
OD – Own Damage
ACC – Average Claim Cost
JV – Joint Venture
EXP – Expenses
U/W – Underwriting
IBNR – Incurred But Not Reported
XOL – Excess of Loss
GCV – Goods Carrying Vehicle
PCV – Passenger carrying vehicle
CV – Commercial Vehicle
TW – Two wheeler
MV – Motor Vehicles
IDV – Insured Declared Value
ULR – Ultimate Loss Ratio
GIC – General Insurance Corporation
CTP – Compulsory Third Party
TPA – Third Party Administrator
WTO – World Trade Organization
MACT – Motor Act Claims Tribunal
TAT – Turn Around Time
RBI – Reserve Bank of India
US – United States
USD – United States Dollar
IT – Information Technology
UK – United Kingdom
NOP – Number of Policies
COR – Combined operating ratio
SIAM – Society of Indian
Automobile Manufacturers.
4
Introduction
24th July 1991 Indian economy was liberalized. Since then, India has seen a steep growth in its economy. Liberalization has allowed Indians to see new facet of life style which was not the case earlier. Lot of Industries has gone through revolutionary changes since liberalization which has enabled the growth of the economy. Few industries can be named which has gone through a radical change since liberalization are Telecommunications, IT, Automobile, Insurance, Banking,
Education etc.
This has changed the mindset of the consumers in India and made them think globally and aspire a better life style as they are exposed to more information and knowledge across the globe.
Indian general insurance industry have come a full circle as shown in the illustration. After 4 decades of being in tariff regime and 3 decades of nationalization era, both liberalization and detariffing came as a paradigm shift to the industry.
Liberal for Foreign
Insurer till 1972 and post 2000 and Non tariffed before 1968 and after 2006
Tariffed since
1968 till 2006 and
Nationalised from
1973 to 2000
Insurance industry in India was de-tariffed from 1st Jan 2007 which has allowed general insurance industry to follow risk based pricing. Such a transformation of the industry has fueled innovation which was earlier deprived by tariff regime.
5
History of General Insurance in India
Beginning
•1850 1st general insurance company named Triton Insurance Company was established in Kolkata.
•1907 Indian Mercantile Insurance company was established which transacted in all class of general insurance business
Insurance Act
•In 1938 insurance act was enacted to formulate and regulate insurance companies.
GIC
•1950 General Insurance Council a wing of insurance association of India was established. •TheGeneral Insurance Council created code of conduct to ensure fair conduct and sound business practice in general insurance
TAC
•Tariff committee established in 1950 as rate maker for GI Industry under GIC.
•1968 TAC was established and made an autonomous body as rate maker and decider of policy terms and conditions.
Nationalization
•1971 GIC was incorporated
•1972 Nationalisation Act of general Insurance enacted
•More than 107 General insurers in India were combined together and 4 general insurance companies were formed
•1973 Four PSU general insurers were formed (National Insurance co Ltd, New India
Assurance company Ltd, Oriental Insurance company Ltd and United india general insurance co ltd) with a holding company as General Insurance Corporation
Liberalization
•1991 India was liberalised in accordance with WTO agreement
•1993 Malhotra committee established to understand the way forward of General
Insurance in liberalised economy.
•1994 Malhotra committee report recommends establishment of a regulator and gradual phasing out of TAC.
•1999 IRDA Act enacted and IRDA came into existance
•2000 Private insurers were provided licence to establish insurance offices in India with a maximum limit of 26% share allowed to be held by foreign insurer.
De-tariffing
•1994 Marine Insurance was de-tariffed in accordance to the recomendation of
Malhotra committee as pilot project.
•1st Jan 2007 all lines of general insurance was de-tariffed except CV TP insurance and
Terrorism cover for fire and other lines of insurance
•From 1st April 2009 policy terms and conditions were also de-tariffed.
.
6
Overview of general insurance industry globally
Non-life premium growth continued to accelerate moderately, growing by 2.6% in 2012 against the growth of 1.9% in 2011. Emerging markets registered a strong growth of 8.6% in 2012 against 8.1% in 2011. Advanced markets grew by 1.5% in 2012 as against 0.9% in 2011. The growth was fueled by price increase in some of the developed markets, particularly in Asia.
The penetration level of US market was consistent while there was volatility in penetration level of UK which can be partially attributed to Euro crisis. However the penetration increase in emerging markets has not made enough dent in the world penetration level to stop the decline caused by developed markets. Asian penetration level has also remained more or less constant for past 5 to 6 years though there has been strong growth provided by India and China.
The penetration level of few developed and emerging markets is given below for understanding the trend.
Penetration %
Penetration against GDP
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2001
India
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0.56% 0.67% 0.62% 0.65% 0.61% 0.60% 0.60% 0.60% 0.60% 0.71% 0.70% 0.78%
China 0.86% 0.96% 1.03% 1.05% 0.92% 1.00% 1.10% 1.00% 1.10% 1.30% 1.20% 1.26%
Brazil 1.78% 1.74% 1.68% 1.63% 1.68% 1.60% 1.60% 1.60% 1.50% 1.50% 1.50% 1.66%
US
4.57% 4.98% 5.23% 5.14% 5.01% 4.80% 4.70% 4.60% 4.50% 4.50% 4.50% 4.52%
UK
3.45% 4.56% 4.75% 3.68% 3.55% 3.40% 3.00% 2.90% 3.00% 2.95% 3.10% 2.84%
Japan 2.21% 2.22% 2.20% 2.25% 2.22% 2.20% 2.10% 2.20% 2.10% 2.10% 2.20% 2.27%
SA
2.78% 2.86% 2.92% 2.95% 3.03% 3.00% 2.80% 2.90% 2.90% 2.80% 2.70% 2.60%
World 3.15% 3.38% 3.48% 3.43% 3.18% 3.00% 3.10% 2.90% 3.00% 2.90% 2.80% 2.81%
Asia
1.77% 1.79% 1.67% 1.60% 1.60% 1.50% 1.60% 1.60% 1.60% 1.64%
While the world general insurance penetration has been declining, the general insurance density has been consistently increasing. There has been significant contribution from Asia in terms of increase in density. This is due to increase in general insurance density in two of world’s most populous countries India and China, incidentally both being in Asia. As seen earlier like penetration, the insurance density has also been volatile in UK. US has been stable for a long time and shown a growth from 2011 to 2012.
7
The insurance densities of few emerging and developed economies are provided below for understanding. Density in USD
USD
2500
2000
1500
1000
500
0
1
2
3
4
5
6
7
8
9
10
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
India
3.5
4
4.4
5.2
6.2
6.2
6.7
8.7
10
10.5
China
11.2
12.9
15.8
19.4
14.7
19.3
40
52.9
64
76
Brazil
46.8
55.2
72.1
88.4
106.9
129.1
123.8
157.7
189
188.7
US
1980
2062.6
2122
2134.2 2164.4 2177.4 2107.3 2127.2
2130
2239.2
UK
1441.4
1318
1311.9 1327.1 1383.2 1275.7 1051.2 1060.2
1188
1094.4
768
830.8
790.4
760.4
736
829.2
840.4
917.4
1031
1024.9
SA
107.4
141
156.2
160.2
159.5
163.6
163.9
200.1
215
198.6
World
202.5
220
219
224.2
249.6
264.2
253.9
263
283
283.1
Asia
43.3
47.1
48.3
50.4
54.1
60.4
62.8
73.5
85
91.9
GI Density (USD)
Country
Japan
Overview on general insurance industry of India in detail
General insurance in India has been growing consistently in all terms GWP, Penetration and density. GWP in India has grown by 458% when compared between 2001 and 2012, while the penetration has grown by just 39% and insurance density showed an impressive growth of 338% between same time periods. However, to achieve the average of insurance penetration and density as that of Asia or the world is quite a long way to go.
GWP (In crores)
Rs in Crores
80000
60000
40000
20000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GWP (In crores) 12383 15237 15595 17481 20360 24905 27824 30352 34620 42576 52876 69047
8
The growth in general insurance premium has been in all the portfolios. Even though the GWP has been growing at such a strong pace, motor insurance has increased its ratio to total general insurance GWP. This growth of motor insurance is fueled by the exemplary growth provided by automobile industry and a large increase in premium for CTP in India. The proportion of various segments of general insurance to the GWP and the growth of those segments are given below for better understanding.
Rs in crores
Segment wise Premium
35000
30000
25000
20000
15000
10000
5000
0
Engineeri
Motor ng Health
Aviation
Liability
Personal
Accident
All
Others
18407
11245
466
1023
1132
6009
2258
24242
13212
482
1228
1373
7049
2446
29777
15341
469
1358
1602
8397
Fire
Marine
2011
4636
2533
1904
2012
5405
2871
2013
6637
3020
Segment wise proportion to GWP
12%
12%
2%
13%
2% 2%
1% 2%
1% 2%
2%
1%
10%
9%
10%
4%
5%
5%
Fire
4%
4%
4%
Marine
Engineering
Motor
Health
Aviation
22% 23% 24%
Liability
39%
42%
43%
Personal Accident
All Others
9
The good news for the general insurance industry is that out of 9 segments 6 segments have managed double digit growth and as usual led by motor insurance with 23% growth with a 43% share in entire GI industry. The next biggest segment for general insurance industry is health which contributes around 22% of entire GI portfolio.
While there has been growth in most of the GI portfolios, the loss ratio’s which include IBNR and XOL has had varied experience. Fire which has been traditionally a profit making portfolio has had its loss ratio increasing consistently especially due to falling rates of fire premium. On the contrary health portfolio has shown a consistent reduction in its loss ratios during last 3 years due to increase in retail health portfolio which is profitable when compared to group health portfolios. Marine and motor has been volatile and the LR has increased between 2010 and 2012.
TP losses played the spoilt sport in increase of losses in Motor portfolio. All other segments together have been the most profitable portfolios in GI industry with loss ratios consistently reducing even though they are already on the lower side when compared to other major portfolios like Motor and health.
Segment wise Loss Ratios comparison
120%
Loss Ratios
100%
80%
60%
40%
20%
0%
Fire
Health
Marine
Motor
Others
2010
80%
111%
78%
85%
57%
2011
86%
100%
90%
103%
56%
2012
97%
94%
83%
95%
54%
The GI Industry has been relying on the investment income as they have been making U/W loss consistently during last 5 years. Though the loss ratio has been hovering around 80% during the last 5 years, the expense ratio has seen a huge fall during last year by around 5%. But as the exposure has been increasing during last 5 years due to the growth experienced by GI industry, the reserve for unexpired risk has also increased. The U/W loss has decreased by almost 9% between 2011 and 2012. The U/W loss decreased when the earned premium and exposure increased. This is a good news to the industry as it shows U/W has been attaining certain level of prudence. This achievement could be attributed to risk based U/W adopted by the industry post de-tariffing avoiding the cross subsidization of profitable portfolio to loss making portfolio during tariff regime. Currently only the CTP rates in motor insurance continue to be tariffed, yet IRDA has
10
taken measures to increase the CTP rates to keep the losses under check. As the GI industry adopted risk based pricing the profitability of the industry is poised to grow in near future.
The details with regard to profitability for past 5 years of the industry are given below for better understanding. Profitability Analysis
Year
Rs in lakhs
2012
2011
2010
2009
2008
NEP
4445100
3493281
2807891
2441145
2102130
Incurred claims (Net)
3499785
2951404
2227448
1971695
1637112
78.73%
84.49%
79.33%
80.77%
77.88%
1320660
1206421
966934
845382
681584
Exp ratio
29.71%
34.54%
34.44%
34.63%
32.42%
Increase in reserve for unexpired Risk
506341
329808
207874
156445
173282
Reserve for unexpired risk ratio
11.39%
9.44%
7.40%
6.41%
8.24%
U/W profit or Loss
-881686
-994352
-594365
-532377
-389848
U/W profit or Loss Ratio
-19.80%
-28.50%
-21.20%
-21.80%
-18.50%
Gross Investment Income
950791
938183
768156
589098
698956
Other income less other outgo
-39635
-32304
-23316
-3814
-14088
Profit before tax
29470
-88473
150475
52907
295020
Loss Ratio
Commission, Exp of management
Unlike developed countries there are restrictions for foreign insurers to set up offices in India.
Foreign insurers have to enter into JV with any of the Indian entity in ratio of 26%:74% to set up office in India. From 2000 when private insurers started doing business in India they have consistently gained share in the Industry.
Emergence of private insurers in India has helped Indian GI industry to improve the service levels. The motor insurance has seen a tremendous decrease in the TAT on settlement of motor
OD claims. Most of the OD claims in motor are being settled on a cashless basis by private insurers. Even the settlement of Motor TP claims has seen a lot of improvement after the MACT has been set up and claims settled through lok-adalats as well.
General insurance industry has expanded to a great extent in India. This is clear from the fact that the GI GWP has grown from mere 2279 crores in 1989-90 to 69046 crores in the year 2012 to
13. The tariff regime was in existence from the year 1968 when TAC was established till the year
2006 when de-tariffing was done for all the products. However, the de-tariffing in whole, which means change of wordings was allowed only in the year 2009 by IRDA. This has put the onus on all the insurance companies to have a good underwriting team who can manage the risk and price them accordingly. De-tariffing has necessitated insurers in India to have a prudent underwriting set up to continue to make proper underwriting decisions based on the risks offered to be insured.
11
Post de-tariffing the role of TAC has changed. Instead of being a rate maker which TAC was during tariff regime, it started maintaining data of the industry and make suggestions to the insurance companies and IRDA with regard to the trend of general insurance industry in India.
Once the insurance industry was liberalized the private insurers started gaining share consistently as against PSU’s who were operating for past 4 decades. Private insurers were growing at a faster pace than the PSU’s. The GWP comparison and their ratios and growth percentages are given below for better understanding.
Ratio between PVT and PSU in %
Premium distribution between PVT and PSU companies
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 to to to to to to to to to to to to to 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Pvt (Rs in Crores)
7.13 465.7 1316. 2257. 3507 5362. 8646. 10992 12321 13977 17425 22315 29653
PSU (Rs in Crores) 9799. 11917 13920 13337 13973 14997 16259 16832 18031 20643 25152 30561 39393
Growth of Pvt companies vs PSU's
200%
Growth %
150%
100%
50%
0%
-50%
2002
to
2003
2003 to 2004
2004 to 2005
2005 to 2006
2006 to 2007
2007 to 2008
2008 to 2009
2009 to 2010
2010 to 2011
2011 to 2012
2012 to 2013
PSU
17%
-4%
5%
7%
8%
4%
7%
14%
22%
22%
29%
PVT
183%
72%
55%
53%
61%
27%
12%
13%
25%
28%
33%
De-tariffing of general insurance also saw the emergence of TP pool. The entire motor CV TP premium would be pooled by the GIC who was the custodian of the TP pool and the TP loss was met by the pool instead of insurance companies. This was also discontinued by IRDA from 31 st march 2012 and started a Declined risk pool which would take only those CV TP policies which
12
are declared as declined risk by the general insurers and the risk is being avoided by them. These
TP risk pools were created with a view that there are no TP risks which are avoided by the industry and all the vehicle owners get the TP insurance cover. As the TP premium continues to be tariffed in India even now, the TP risk pool would allow the insurers to join together and share the loss on the basis of the market share that they have in the industry.
De-tariffing of policy wordings also resulted in introduction of lot of new products in Motor
Insurance which the industry was deprived for a very long time during tariff regime. There were lots of innovative products introduced by various insurers. This has created awareness in the minds of Indian consumer and they have started understanding the insurance contracts before they are entered into. Most of these products are already there in the western markets and they have started finding ways into India post de-tariffing.
In terms of distribution of general insurance products Individual agents have been the largest contributor of premium and no of policies traditionally in India. The same continues to be true even now both, in terms of number of policies sourced and the GWP sourced by them. The most interesting factor about 2011 – 2012 is that the no of policies sourced by most of the distribution channels have come down and yet the premium sourced has gone up. This shows that the average ticket size of the products sourced by various channels have gone up. Only in case of corporate agents and Banks both number of policies sourced and the GWP sourced have declined. The reason of such decline is that both these channels are contributing more towards non motor premiums.
It is also striking that the general trend of no of policies sourced has come down from most of the distribution channels. Though the general insurance industry is growing in terms of GWP the actual distribution does not seem to have happened. It’s very clear that the price hardening is the reason for growth of general insurance industry rather than a organic growth which is expected.
Distribution trend for past 3 years is given below for better understanding.
60000
2011 - 2012
50000
2010 - 2011
40000
2009 - 2010
30000
20000
10000
0
Policies GWP Policies GWP Policies GWP Policies GWP Policies GWP Policies GWP Policies GWP
(in
(In
(in
(In
(in
(In
(in
(In
(in
(In
(in
(In
(in
(In
'000) crores) '000) crores) '000) crores) '000) crores) '000) crores) '000) crores) '000) crores)
Individual
Agents
Corporate
Agents
Banks
Brokers
Direct
Business
Referal
Arrangements
Others
13
Emergence and Role of Tariff Advisory Committee
In 1950 the Insurance act 1938 was amended to form a Tariff committee. The Tariff Committee came under the supervision of General insurance council. From 1950 to 1968 the Tariff committee was deciding the rates and all the general insurance companies were obligated to follow the rates decided by Tariff Committee.
In 1968 Insurance Act 1938 was further amended and a statutory body was formed which was called as Tariff Advisory committee. It was the Tariff Advisory committee which was deciding the rates for various products and the terms and conditions of the acceptance of the risk at the specified rate. Only TAC had the right to create, Amend or Modify the rate or the terms and conditions of various products. The introduction of TAC was seen as an independent, Impartial and scientifically driven body for rate making.
After the nationalization of general insurance in 1972 the TAC was governed by the same chairman of GIC. This was widely criticized in Malhotra committee report, as all the members of
TAC were nominated by GIC only. Malhotra committee report also pointed out that the rates decided by TAC did not always reflect the market price. After the 1988 amendment of rates of
Motor CTP, the liability under the third party cover became unlimited and yet the rates were not revised due to political pressure from transport association.
By 1994 the Malhotra committee report also suggested to delink TAC from General Insurance
Council and also recommended for gradual phasing out of TAC with the exception of few areas.
Thus after the emergence of IRDA in 1999 and liberalization of insurance industry, the TAC was set to be abolished with effect from 1st Jan 2006. However, finally the detariffing took effect from 1st Jan 2007 for all products in India and the TAC was abolished.
Then the same was reformed as Insurance Information Bureau which became the data keeper for general insurance industry. Knowing that the Insurance is a data intensive industry, where all management decisions including rates were to be taken based on the data. The better the quality of data the better would be the decision of the managements. Thus, to provide all the stakeholders with accurate, timely and reliable insurance data for prudent underwriting the IIB was formed.
Emergence and Importance of IRDA
In 1994 after the Malhotra committee had issued the report, changes in insurance industry was imminent. IRDA (Insurance Regulatory and Development Authority) was formed to monitor and develop the insurance business in India by passing of Insurance Regulatory and Development
Authority ACT 1999.
14
One of the important reasons for creating IRDA was to liberalize the insurance industry. IRDA would be regulating all the parts of insurance business in India. Life insurance, General
Insurance and Re-insurance would come under the purview of the regulator.
As soon as IRDA was formed in 2000, the regulator started issuing licenses to private insurers to set up offices in India. Private insurers were allowed to have foreign partners with a 26% share.
Since then more than 50 insurance companies have emerged in both life and general insurance space put together in India. However, there have been no taker for reinsurance space in India as the reinsurance is even now majorly dependent on general insurance and the average retention by insurance companies are 85%. The compulsory cession of 20% by all general insurers in India with GIC is also mandated by IRDA with a view to maximize the retention and reduce outflow of foreign currency by way of reinsurance premium.
IRDA also regulates and controls the rates and the policy terms and conditions. Every product sold by any insurer requires an approval from the regulator. IRDA conducts periodical audits with the insurance companies to understand the compliance of all regulations laid down by the regulator. IRDA regulates the investments of the insurance companies as well. The investments and the proportion that can be invested on a specific portfolio by the insurer are prescribed by IRDA.
IRDA makes sure that the interests of all the policy holders are protected and the solvency margins are properly maintained by the insurance companies.
One area where IRDA made a huge difference was in distribution of insurance products. IRDA made it compulsory for anyone to distribute insurance products to be licensed by the regulator.
Only licensed agents, Brokers, corporate agents, Banks and micro finance companies can distribute insurance products with due approvals from the regulator. This ensured that the insurance customers are not misled and someone who sells the insurance products is well informed about them. IRDA also made it mandatory for all the insurance companies to have a proportion of rural business in their portfolio so as to make sure that the insurance reaches the rural population as well and they continue to be affordable.
IRDA also mandated the surveyors to be licensed by the regulator for being eligible to assess losses. This made sure that the surveyors are following the proper process while assessing the loss and they can be held accountable for their actions. IRDA also regulates the TPA’s for settling health claims. This has ensured that the health insurance customers get timely service and their claims are addressed immediately.
As suggested by Malhotra committee, IRDA also worked on phasing out TAC and de-tariffed the general insurance products for the rates to be controlled by market forces. This move enabled the Indian general insurers to follow risk based pricing. De-tariffing also enabled a lot of new products available in developed markets to be marketed in India and fueled innovation in insurance industry.
15
Brief discussion on Indian Automobile industry and its relevance to GI industry
Automobile industry has been the integral part of the economic growth in India. The growth in automobile industry has been at its peak during the last decade. The sales of vehicles have doubled between 2005 and 2012. The industry contributes around 7% to India GDP and expected to cross 10% by 2016. As per ministry of road transport 141.8 million vehicles are on road including TW by 2011 out of which TW constitutes 71.8% while passenger car constitutes
13.6% and all others put together constitutes the rest of 14.6%.
India automobile industry grew at a compounded annual growth rate of 9.9% in terms of registered vehicles between 2001 and 2011.
Vehicle population in millions Vehicle population (In Millions)
150
100
50
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
Vehicle population (In Millions) 55
58.9
67
72.7 81.5 89.6 96.7 105.3 115 127.7 141.8
Motorization in India as on 2011 is 117 per 1000 people. Out of this 76 are TW and 13 are passenger cars. Rest is commercial vehicles. In developed countries the passenger cars motorization is above 400 and in Japan it is as high as 617 per 1000 persons.
Motor insurance contributing to 45% GWP of the entire GI industry has a lot of dependency on automobile industry. In India third party insurance is compulsory for any vehicle that runs on the road as per Motor Vehicles Act 1988. Thus the growth of automobile industry during last decade has been contributing to the growth of GI industry as well to a great extent.
Though as per the Ministry of road transportation 142 million vehicles are registered and plying on the road the number of motor policies issued in the year 2013 is only 63.67 million policies. If we compare it apple to apple, in the year 2011 the number of policies issued is only 43.93 million. This means only 1/3rd of the vehicles registered are insured and rest are plying uninsured. Considering the fact that the automobile industry is facing a downward trend during 2013, insurers can concentrate on the penetration of motor policies against the vehicle population and increase Motor GWP. As India has the policy of CTP, it is possible if the distribution is strengthened by the insurance companies.
16
A new trend has been started in India during last decade where auto manufacturers have started to directly negotiate with the insurance companies and creating their preferred list of insurers where they would have negotiated some favorable terms for their customers both in terms of pricing (premium) and in terms of claim settlement. Such negotiation in premium has been having a direct impact on the on road price of the vehicle sold and this factor is utilized by the auto manufacturers for running free insurance schemes and other schemes to compete in the competitive automobile market. Auto manufacturers have started showing interest in insurance as they have understood that the body shop revenues are directly related to insurance. Insurance has also provided them a stream of consistent revenue in terms of commission on policy issued.
Thus the auto manufacturers are becoming more and more sensitive to insurance and working with various insurers to create synergy between both the industries. Insurance works on the law of large numbers and insurers understood that the best channel to be tapped for motor insurance would be the manufacturer themselves. This would create a new channel of distribution for insurance companies and a good source of revenue for auto manufacturers.
Brief discussion on Motor Insurance
Motor Insurance is the one largest portfolio for general insurance industry contributing 43% of
GI industry GWP. Motor Insurance has two parts in it. One is Own Damage and another is Third
Party.
Insurance industry was under tariff regime from 1968 to 2006. Thus the premium was charged on the basis of the mentioned tariff rates on Indian Motor Tariff prescribed by Tariff Advisory committee a statutory body governed by General Insurance Council. From 1 Jan 2007 the motor insurance was de-tariffed by IRDA only for the rate and not the terms of the policy. IRDA also allowed de-tariffing of policy wordings from 1st Apr 2009 enabling various new products to be launched in motor insurance as discussed earlier. The de-tariffing happened only for the own damage part of the premium to be charged and TP continues to be tariffed by IRDA, considering the sensitivity of the portfolio.
Perspective on De-tariffing
India has been under tariff regime for past 4 decades. GI industry was nationalized in 1972 and both TAC and the Insurer were reporting into government. PSU’s did not consider it important to maintain proper data and hence TAC was also deprived of data to take any informed decision on rates backed with data. Hence the rates prescribed by TAC were derived on an adhoc manner.
Generally the rates during tariff regime would be higher as the case was in other countries and when the de-tariffing happens the prices fall due to competition. However in India the rates were
17
very low during tariff regime. The motor rates were between 2 and 3 percent while the rates in developed markets were 8 percent. The third party rates for motor insurance were also very low and both due to lack of data and due to political pressure put by transport associations the prices were continued to be very low in India even though the liability was made unlimited for third party life or permanent disability, though property damage liability was limited under Motor
Vehicles Act 1988. Hence, Motor OD premium was cross subsidizing the TP loss for a very long time. The Malhotra committee had recommended for a periodical phasing out of TAC in their report in
1994. The Rangarajan committee recommended to de-tariff the Motor OD portion and to keep the TP portion tariffed, as insurers were avoiding loss making portfolios like TP only policies.
Hence such TP risks might go uninsured. Rangarajan committee also recommended to quarantine motor TP portfolio by all the insurers and asses the TP loss. This resulted in IRDA creating a TP pool under the supervision of GIC, where all the general insurers in India would seed their CV TP premium with the pool and the pool would make the payment for TP claims.
During tariff regime there was a lot of rigidity in rates resulting in lack of innovation and customers with good risk were also asked to pay higher premium as per the rates prescribed by the TAC. Whatever premium was coming according to the rate prescribed by the TAC only should be payed and the premium would be equal to the customers who were having the bad risk in the same category. Thus good risks were cross subsidizing the bad risk in the same class or across the different class of insurance. As the industry was nationalized and tariffed the PSU’s were underwriting the risk without looking at the profitability.
In 1999 once the IRDA came into existence the insurance industry was liberalized and private insurers were allowed to enter the industry. But as the industry was tariffed, they were not able to do much of value add in terms of product innovation. But the services of the industry had improved to a great extent and the private insurers were also lobbying strongly with the regulator to detariff. Private insurers also had good systems back up which would provide quality data for analysis. IRDA considered the way forward would be de-tariffing for the industry and formed a committee headed by SV Mony to draw the road map for de-tariffing the motor insurance. SV Mony committee recommended for de-tariffing but with some rating factors kept as base so that the pricing can work around the same like loading and discounting. Else the committee cautioned that there can be a collapse of rational underwriting. The regulator also felt the need for risk based pricing and product innovation which was possible only by de-tariffing.
18
Road map to de-tariffing of motor insurance
After Malhotra committee recommended phasing out TAC gradually in their report, Marine insurance was de-tariffed in 1994. The rate of marine insurance crashed and loss ratio increased.
Having this in mind IRDA decided to de-tariff on a phased manner which would give enough time to consolidate and sustain the same by the market and insurance companies.
Thus IRDA chalked down the plan and de-tariffed all class of general insurance which was still tariffed on 1st Jan 2007 except for Motor TP premium. The effect of de-tariffing was only in the rates to be charged and not on the policy terms and conditions. Further the policy terms and conditions was de-tariffed effective 1st APR 2009.
Under de-tariffed scenario the insurers can innovate new product and sell them based on the file and use method with IRDA. IRDA also created a TP pool in which all the insurer would seed the
CV TP premium and the loss would be shared on the basis of market share. This allowed the motor TP premium to remain tariffed and rest all de-tariffed.
Analysis on impact of de-tariffing motor insurance to GI industry
De-tariffing of general insurance was a paradigm shift to the industry after remaining tariffed for more than 4 decades. Hence, such changes always come with some impact. Impact of detariffing general insurance industry was felt in various manners which are being discussed below: Impact 1 – TP Pool – IMTPIP & Declined risk pool
De-tariffing did have one of the major impacts on the product portfolio which was not detariffed. The Rangarajan Committee had recommended to de-tariff the OD portion of motor insurance and also recommended to quarantine the TP premium and continue to keep the TP premium tariffed considering the sensitivity of the portfolio. TP insurance has been a challenge for the industry to handle in view of its tariffed nature and non availability of credible data. The
TP premium was not de-tariffed by IRDA considering the compulsory nature of the insurance and high losses which may lead the insurers to avoid the portfolio or charge exorbitant price which may result in vehicle plying on the road without insurance.
Till 2006 the motor TP premium was administered by the TAC through IMT. Historically the motor TP portfolio has been highly loss making for the general insurers in India. Motor TP insurance is mandatory in India under section 146 of motor vehicles act 1938. Motor TP policies have certain unique characteristics associated with the business. The TP portfolio is quite long tailed and it might take 7 to 8 years to mature. The MV ACT (Amendment) 1988 does not
19
impose any restriction on the liability amount of insurers on TP claims. The awards are extremely unpredictable and form precedence which might put the financial stability of an
Insurer in jeopardy. With transporters lobbying against the increase of TP premiums, it’s become extremely riskier and capital intensive for an insurer to carry out business in this portfolio.
To reconcile the unviability of this portfolio IRDA vide direction dated 4thdec 2006 had constituted the IMTPIP under the supervision of GIC. All the insurers except for specialized line insurers were directed to participate in the IMTPIP created for commercial vehicles exclusively and the other TP premium for such as private vehicles were continued to be underwritten outside the pool.
A declined risk pool was also considered by IRDA as being done in Malaysia. But considering the compulsory nature of the TP insurance and regulated price for the same, IRDA had thought of creating IMTPIP instead of Declined pool. All CV TP premiums were to be seeded in the pool by the insurers. The losses of the pool would be later divided among insurers according to the market share that they hold in order to ensure a level playing ground. But, this did not run for long as the loss reported were extremely high and the ULR computed made the insurance companies to infuse fresh capital to keep the pool solvent.
TP POOL LR DATA Without IBNR
Loss Ratio
250.00%
200.00%
150.00%
100.00%
50.00%
0.00%
2007 - 2008
2008 - 2009
2009 - 2010
Loss ratios as on 31/8/2010
126.66%
90.01%
30.48%
Ultimate loss ratios as computed by actuaries
172.30%
181.81%
216.32%
With such a high ULR estimated IRDA decided to dismantle the IMTPIP and introduce declined risk pool. They also simultaneously initiated their discussions with the transporter lobbyists to increase the TP premiums with support of the data generated by IMTPIP. This resulted in increase of TP premium 3 times in previous 3 years.
The interpretation of section 146 of MV ACT (Amendment) 1988 to the effect that an insurer cannot decline a TP insurance still remains. Considering the loss prone nature of the TP portfolio, pricing of TP premiums in commensurate with the risk was accepted by IRDA. Hence,
IRDA considered as long as the TP premium pricing is administered, an insurer should be given
20
an option to decline the risk. Under the amendment to insurance laws (amendment) bill 2008 which proposes the insurers to underwrite minimum percentage of motor third party risks, it was clear with this amendment the IMTPIP was not required in the current form. Thus, declined risk pool came into existence by 1st Apr 2012 as the IMTPIP was dismantled with effect from 31 st
Mar 2012. The loss generated by IMTPIP was to be taken care by the individual insurers who ever have accepted the risk.
All the insurance companies carrying out business in motor insurance should be part of declined risk pool. Insurance companies should provide their underwriting guidelines which would provide the risks that are declined by the insurer considering the pricing of the proposed risk which is administered. All such risk can be seeded with the declined risk pool which is administered by GIC. GIC would act as a reinsurer for all such declined risk which has been declared as declined risk by the insurance companies and the premium seeded with the declined risk pool.
Impact 2: Premium Ticket size
After 3 decades of PSU monopoly and close to 4 decades of tariffed regime, the liberalization and de-tariffing came as a relief to the insurers. The de-tariffing allowed the insurers to do risk based pricing and with competition around from private insurers the pricing of good risk was sure to decline and bad risk attracted increase in premium. Thus the OD premium part which was profitable for insurers immediately started showing a declining trend. As private car is the largest contributor to motor premium and the OD portion being the highest for the portfolio the decline in rate showed its highest effect on this portfolio.
As discussed earlier while the OD premium ticket size declined, TP premium ticket size started climbing up. OD portion formed more than 60% of motor premium until 2010 and was at 59% till 2012. But the increase in TP premium rates has resulted in reduction of OD premium in proportion to the total Motor premium generated by the industry. Thus by 2013 the proportion of
OD premium to total motor premium declined to 53%. This decline in the proportion of OD premium also resulted in increase in premium ticket size during 2012 to 2013. This can be witnessed in the premium ticket size trend analysis.
Initially from 2005 to 2006 the premium ticket size went up as a result of a boom in automobile industry and insurance industry remaining to be tariffed. The increase in new vehicles and high end vehicle sales in private car segment and a boom in infra industry also provided the increase to the premium ticket size of these two portfolios in particular as the average IDV increased due to new vehicles insurance. But post de-tariffing even though the auto industry was in boom the premium ticket size declined due to the impact of de-tariffing.
The CV portfolio did not show the kind of volatility which was showed by private car and special type of vehicles. The reason for the premium ticket size not suffering a decline in CV portfolio was due to parallel increase of TP premium while the OD part was declining in GCV and the OD portion being very low in PCV in comparison to other class of motor business while
21
TP premium increased considerably. The OD to TP ratio in both GCV and PCV are approximately 35:65 as of 2012.
In TW the premium ticket size is quite low yet the OD portion did suffer a decline due to detariffing but over all premium ticket size seemed to be intact or rather growing due to increase in
TP premium. The proportion of OD to TP in TW is almost 50:50. Thus increase of TP premium has compensated the loss of premium in OD portion due to de-tariffing.
The ticket size trend analysis is given below to understand the same.
Premium ticket size
Motor Premium ticket size trend
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Total Premium
2772
3467
3290
3202
3213
3316
3939
4469
TP
977
979
1230
1234
1193
1168
1624
1893
OD
1796
2487
2061
1968
2020
2147
2315
2576
Premium Ticket Size
Classwise premium ticket size trend
16000
14000
12000
10000
8000
6000
4000
2000
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Pvt
4982
6505
6401
5972
6179
6585
7128
7615
TW
552
588
659
637
665
691
735
779
GCV
8766
8612
9838
9296
8965
9564
12135
14672
PCV
5044
5140
6488
6280
6384
6377
8749
9965
Special Type
3973
5058
3916
4523
4216
4398
5469
5769
22
OD Premium Ticket Size Trend
7000
Premium Ticket Size
6000
5000
4000
3000
2000
1000
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Pvt
4069
5672
5058
4694
4933
5308
5716
6194
TW
321
354
314
295
325
352
369
386
GCV
4905
4968
4843
4382
4248
4668
4701
5221
PCV
2360
2385
2588
2558
2640
2752
3021
3307
Special Type
2771
4083
2952
3454
3238
3453
3903
3675
TP Premium Ticket Size Trend
Premium Ticket Size
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
Pvt
912
834
1342
1278
1247
1277
1412
1421
TW
230
233
345
342
340
339
366
393
GCV
3861
3644
4995
4914
4717
4896
7434
9451
PCV
2684
2756
3900
3723
3744
3626
5728
6658
Special Type
1202
975
964
1069
979
945
1566
2094
23
Impact 3: Loss Ratios
The Loss ratios has been showing a declining trend over all. But this cannot be termed a 100% correct analysis as the TP loss ratios are calculated on Incurred claim basis while IBNR is not included and the loss ratios are not taken on the basis of ultimate loss ratios. Yet, the increase in
TP premium during last 3 years might provide some hope to the insurers for the TP loss ratio to decline. As the TP portfolio takes 7 to 8 years to mature and the TP premium having increased recently may not provide the exact picture and a correct result of the increased TP premium.
However, the OD loss ratio showed an increasing trend as soon as the de-tariffing happened. But, the same started showing a declining trend post 2009 yet, not coming to the level of 2005 – 2006 or 2007 – 2008. This can be attributed purely to de-tariffing as it has reduced the average OD rating in all class of business.
More accurate way of understanding the Loss ratios would have been to calculate the same on
NEP (Net Earned Premium) basis. But due to lack of NEP data portfolio wise (TP & OD), we have computed the same on GWP basis. Yet, this can allow us to understand the trend on a macro basis.
The Loss ratio analysis of incurred claim against the GWP is provided below for better understanding. LR based on GWP and Incurred Claim
250%
Loss Ratio
200%
150%
100%
50%
0%
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
2012 2013
LR OD
46%
26%
45%
58%
55%
54%
53%
51%
LR TP
192%
96%
126%
114%
98%
113%
90%
76%
Total LR
98%
46%
75%
80%
71%
75%
68%
62%
24
Impact 4: Profitability of Insurers
The motor loss ratio did show an increasing trend as soon as the de-tariffing happened. Though, it came to the same percentage as that of 2005 – 2006 in the year 2009 – 2010 and again increased. This shows the kind of volatility that has been encountered by de-tariffing the rating of motor insurance.
However, though motor insurance has been around 43% of the total GI portfolio, the loss ratios of motor insurance has always been higher than the industry loss ratios which means that the other lines of business continues to be more profitable than motor insurance. Though the LR of motor insurance has been higher and margin under strain, it is motor insurance which provides the necessary cash flow to the GI industry on a regular basis. With 43% share in GI industry, motor insurance is one portfolio which cannot be avoided. Considering that the motor loss ratios are higher than that of industry, which is majorly caused by TP losses needs to be set right. The only way to do it would be to follow risk based pricing which in long term can achieve the reduction of loss ratios.
GI industry has been marred with underwriting losses for a long time now. Though the industry has been having underwriting losses the investment income generated by the insurance companies has come for their rescue and allowed them to keep themselves afloat. With investment incomes slowing down due to the slowdown in global economic situation, the insurance industry have to be more careful to manage the risk efficiently and reduce the underwriting loss which can keep the insurers at least at break even. This would mean that there has to be more prudent underwriting which has to be done and the regulator has provided enough opportunity by de-tariffing.
Motor LR vs Industry LR on NEP
120%
Loss Ratio
100%
80%
60%
40%
20%
0%
2006 - 2007
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
Motor LR
85%
92%
89%
85%
103%
95%
Industry LR
74%
78%
81%
79%
84%
79%
25
Profitability Analysis
100.00%
80.00%
Ratios
60.00%
40.00%
20.00%
0.00%
-20.00%
-40.00%
2005 2006
2006 2007
2007
- 2008
2008
- 2009
2009
- 2010
2010
- 2011
2011
- 2012
Loss Ratio
83.03%
73.73%
77.88%
80.77%
79.33%
84.49%
78.73%
Exp ratio
37.54%
31.44%
32.42%
34.63%
34.44%
34.54%
29.71%
Reserve for unexpired risk ratio
6.06%
9.29%
8.24%
6.41%
7.40%
9.44%
11.39%
Investment income against NEP
40.00%
in %
35.00%
33.00%
24.00%
27.00%
27.00%
21.00%
U/W profit or Loss Ratio
-26.63% -14.46% -18.55% -21.81% -21.17% -28.46% -19.84%
Profit Before Tax Ratio
12.36%
20.00%
14.03%
2.17%
5.36%
-2.53%
0.66%
There is 10% volatility in the ACC between 2007 and 2013 and the frequency of the claim has also not changed much though there has been volatility during 2009 to 2012 before again settling down in 2013 at the same frequency as that of 2007 – 08. Barring “others” portfolio which is more of motor trade risk policies other portfolios has been fairly stable both in terms of ACC and frequency. Considering the frequency and ACC having only 10% volatility for past 5 years a reduction in premium can create a deep impact on profitability of that portfolio.
However, the decline in the OD premium has been compensated by an increase in the TP premium as seen earlier in the ticket size trend analysis the loss ratios of the insurance companies has not been affected much due to de-tariffing. Increase in penetration to the vehicle population which has been happening during last 5 years is also a reason for frequency remaining stable. If the NOP does not increase every year the frequency would increase which is evident from the below analysis. This situation was encountered in 2010 – 2011. The NOP in 2009 – 2010 dropped from 2008 to 2009 and this resulted in increase of claim frequency in 2010 – 2011.
Hence, with slowdown in auto industry there is a lot of probability that the NOP may not increase to the desired extent which inturn may increase the frequency. Higher frequency with constant claim cost of higher claim cost would result in increased loss ratios which would result
26
in strain of profitability of the industry. Hence it’s imperative now for GI industry to increase the
NOP and GWP which can keep the LR constant. Hence, if the NOP is not able to be increased due to the slowdown of auto industry the premium rates may harden to increase the premium for counter the increased LR due to increased frequency. Thus de-tariffing also provides opportunity to counter a slowdown situation as well by increasing the premium rates which is not possible during the tariff regime.
The growth of NOP, GWP and the frequency percentage has been provided below to understand the same. Last 5 years frequency and ACC has been given below for easy understanding.
NOP and GWP growth vs claim Frequency
Ratios
60%
50%
40%
30%
20%
10%
0%
-10%
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
2012 - 2013
NOP Growth
53%
7%
-4%
17%
27%
14%
GWP Growth
45%
5%
-4%
21%
51%
29%
Frequency
10%
10%
9%
12%
9%
10%
Frequency
Frequency
80%
70%
60%
50%
40%
30%
20%
10%
0%
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
2012 - 2013
Total
10%
10%
9%
12%
9%
10%
Pvt Car
17%
18%
20%
23%
21%
22%
TW
3%
3%
3%
4%
3%
3%
GCV
18%
18%
10%
25%
16%
16%
PCV
18%
17%
11%
23%
18%
16%
Special Type
5%
6%
4%
7%
7%
7%
Others
33%
59%
33%
44%
47%
72%
27
Average Claim Cost
Claim cost
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
2007 - 2008
2008 - 2009
2009 - 2010
2010 - 2011
2011 - 2012
2012 - 2013
Total
25539
26174
26331
21245
28559
27358
Pvt Car
20309
21567
19242
18791
22231
20816
TW
11645
11125
10428
9590
11871
12518
GCV
50894
55330
77961
34626
61784
57493
PCV
37642
34290
49960
25262
36395
39615
Special Type
55695
69639
76178
45616
45477
60076
Others
18622
6527
6152
18011
11166
23579
Impact 5: Motor Insurance growth Vs GI industry growth Vs Automobile industry growth
Motor GWP has been growing during the de-tariff regime. However, the motor insurance growth rate fell initially during 2007 to 2010 due to rate decrease in motor insurance and slowdown in economy. However, with automobile industry booming since 2010, the GI industry had also shifted its gear between 2010 and 2012. But the growth of Auto industry started declining from
2012 which also resulted in the slowdown in the growth of motor insurance while the industry continued to grow. This would mean that the other segments of GI have grown irrespective of the slowdown in the economic growth. This would also come as good news to the insurance industry as the loss ratio of motor insurance has been higher than the industry loss ratio traditionally as discussed earlier.
The reason for growth of motor insurance can be attributed to the increase in the TP premium and growth of automobile industry. Hence we can find from the below illustration that the motor insurance has witnessed a better growth between 2008 and 2012 while automobile industry was also growing at a rapid pace. The Motor insurance growth was not equivalent to that of automobile industry due to de-tariffing which has resulted in the reduction of premium rate.
However, the motor insurance grew at a faster pace in 2012 as the TP premium was increased though the automobile industry was witnessing a steep decline in their growth rate.
28
Motor OD Vs TP Growth chart
100%
Growth
80%
60%
40%
20%
0%
-20%
20062007
20072008
20082009
20092010
20102011
2011-201
2
20122013
Motor OD Growth
45%
26%
3%
-2%
25%
37%
21%
Motor TP growth
5%
92%
8%
-7%
15%
77%
55%
GII Growth vs Motor Insurance growth vs Auto industry growth
60%
50%
Growth
40%
30%
20%
10%
0%
-10%
20062007
20072008
20082009
2009-20
10
20102011
20112012
20122013
GII
22%
12%
9%
14%
23%
24%
31%
Motor
31%
45%
5%
-4%
21%
51%
35%
Automobile
14%
-5%
1%
26%
26%
12%
Motor TP has been growing at a greater pace than the Motor OD premium. This phenomenon can be purely attributed to de-tariffing of motor insurance. Reason being, the de-tariffing made the regulator to increase TP premium in 2007, 2011, 2012 and 2013 which resulted in the phenomenal growth of TP premium during those years which the illustration also suggests.
However, OD premium rate declined due to de-tariffing and hence the growth slowed down in the OD part pulling down the growth of entire Motor insurance GWP.
29
Impact 6: Penetration of motor insurance against the vehicle population in the country
The penetration of insurance among vehicle population has been growing consistently in all class of vehicles. This phenomenon may be attributed to de-tariffing but the same should also be attributed to liberalization as well. Liberalization has enabled the private insurers to set up office in India and these private insurers have unparalleled hunger for premium which has enabled in the increase in penetration of insurance among vehicle population.
Partially the increase in the penetration can also be attributed to the initiative of introducing TP pool and declined risk pool post dismantling of IMTPIP which has enabled insurers to accept the all class of TP risk. Hence, de-tariffing has also had an impact on the improvement in penetration of insurance among vehicle population. This was not possible without de-tariffing and liberalization. Penetration of insurance policies against vehicle population 80%
70%
Penetration
60%
50%
40%
30%
20%
10%
0%
2005 2006
2006 2007
2007 2008
2008 2009
2009 2010
2010 2011
2011 2012
Pvt Car
32%
43%
54%
55%
50%
52%
60%
TW
19%
20%
27%
27%
23%
25%
28%
GCV
47%
45%
55%
56%
53%
51%
69%
PCV and Special Type
26%
23%
33%
36%
31%
34%
36%
Total
23%
25%
33%
33%
29%
31%
35%
30
Impact 7: Capital Infusion and FDI flow
The below illustration clearly provides the comparison of insurance companies capital which is consistently increasing. During de-tariffing even PSU’s had to increase their capital. The increase in the capital post de-tariffing after 2007 has been climbing on a higher pace. This phenomenon can be attributed to de-tariffing as the premium rate declined and the loss ratios started climbing up. Such increase in loss resulted in insurance companies particularly private insurers required to increase capital for maintaining solvency margins while PSU’s has huge reserves to back them up for such eventualities.
The below illustration would clearly show the capital infusion of all the insurance companies who were operational on or before 2003.
Capital in crores
Equity Capital Infusion
3000
2500
2000
1500
1000
500
0
2003 2004 2005
2006 2007 2008
2009 2010 2011 2012
PSU Insurers (In Crores)
400
500
550
PVT Insurers (Entered on or before 2003) (In Crores)
883 1048.9 1048.9 1279.0 1400.8 1501.7 1725.4 2068.0 2246.4 2483.9
400
450
550
550
550
550
550
A comparison between insurance companies who started before de-tariffing and the companies who started after de-tariffing shows the increase in capital requirement for companies who started after de-tariffing. The capital infusion of private companies started after de-tariffing is almost equivalent to the private companies started before de-tariffing. While the GWP of the companies started before de-tariffing are 6 times more than that of the companies started after de-tariffing. This phenomenon may be fully attributed to de-tariffing of general insurance industry which has induced a cutthroat competition among all the general insurers resulting in reduction of rates.
Such reduction of rates has resulted in increase of loss which has put the solvency margin under strain and made the capital infusion necessary. Thus de-tariffing has made the insurance industry more capital intensive.
31
Capital in crores
Capital Infusion comparison during tariff and detariff regime
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
2003
PVT Insurers (Entered on or before 2003) (In Crores)
GWP (In Crores)
2004 2005 2006
2007 2008 2009 2010
2011 2012
883 1048.9 1048.9 1279.0 1400.8 1501.7 1725.4 2068.0 2246.4 2483.9
1195.2 2077.7 3132.5 4941.9 8132.5 10388 11722. 12819 15125. 18431.
PVT Insurers (Entered after detariffing) (In crores)
0
0
0
0
0
300 807.83 1092 1709.2 2376.7
GWP (In Crores)
0
0
0
0
0
10.29 358.89 1294.9 2299.2 3883.1
As de-tariffing has resulted in increase of capital, the FDI flow also increased as lot of foreign insurers has set up their offices in India in JV with an Indian partner. 8 multiline private insurers were in India before de-tariffing and 7 new multiline general insurance companies ventured in the industry post de-tariffing. Though it may not be right to attribute the fact of 7 general insurers starting their companies after de-tariffing only to de-tariffing of the industry, definitely it is one of the reasons for new insurers to show interest in the Indian market.
Considering the FDI flow being one of the important factor to control inflation in India and better our balance of payments, the general insurance industry has been contributing to it on a high note. With the new bill which is in the process to be passed to increase the FDI cap to 49% from 26%, the contribution of GI industry to FDI in India would increase multifold. Apart from this the general insurance business becoming more capital intensive would also result in increased FDI flow in India.
FDI FLOW (In Crores Rs)
FDI in crores Rs
1500
1000
500
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
FDI FLOW (In Crores Rs) 175.76 175.76 246.21246.21 306.02 337.24439.61 621.72 782.3 927.18 1117.7
32
Impact 8: Emergence of New products
De-tariffing of motor insurance has allowed introduction of new products in India by the insurance companies. After 4 decades of tariff regime, de-tariffing enabled the insurance companies to introduce new add on products in India. The Indian customers were deprived of such innovative products during tariff regime. Currently there are various new products introduced by insurance companies. Some of such new products are as following:
1) Nil Depreciation (Most popular add on product. This cover protects the customer against the depreciation charged on the replacement or repair of the damaged part)
2) Consumables cover (A cover which will cover various consumables used during the repair of the vehicle)
3) Hydrostatic lock cover (A cover for extended loss due to water ingression into the engine) 4) Engine protector (A cover for extended loss to engine due to oil leakage because of under body damage)
5) Tyre cover (A cover to damages caused only to tyre without any damage to other part of vehicle – This is an exclusion under IMT)
6) Key Cover (A cover for high end vehicles where the cost of key is high and this comes into existence when the key is lost)
7) O/S Loan protector (A Cover which can protect the insured from the vehicle loan in case of death or a PTD)
8) Road Side Assiatance (A cover which can provide service to customer in case the vehicle is stranded any where due to accident or break down)
9) NCB protector (A cover which would protect the NCB even when a claim is araised in the policy)
10) Loss of baggage (A cover which would provide financial compensation if the baggage is lost while travelling in the vehicle)
11) Hospital cash cover ( Provides a fixed sum to the insured per day for the number of days hospitalized due to accident in the insured vehicle)
12) Mediclaim cover (Provides cover for the medical expenses incurred due to hospitalization in case of accident occurred while in insured vehicle)
13) Ambulance cover ( Provides compensation on ambulance charges which has occurred due to accident in insured vehicle)
Most of the new products introduced in motor insurance by various insurance companies have been listed down. The list may not be fully exhaustive as various companies have come up with various new products. This kind of value addition for customers was possible only due to detariffing. The private insurers with foreign JV partner have been quite quick in introducing various products which are prevalent in developed markets.
33
De-tariffing of motor insurance and its impact on Indian economy
Most of the Impact of de-tariffing has been already discussed in this report. One of the major impacts of de-tariffing to the economy was the FDI flow that it created. The flow was created by allowing PVT insurers set up offices in India and the other insurers who were already there had to increase their capital due to de-tariffing, thereby increasing the FDI flow in India.
Insurance jobs were one of those which were not attractive earlier. Later with liberalization happening and new MNC’s entering India, the Insurance industry started attracting lot of youth to pursue career in insurance. This enabled the industry to provide a huge employment opportunity in India for Indian youth.
Abolition of tariff regime and introduction of de-tariffing proved to be one of the motivator for foreign insurers to set up their offices in India. Tariff regime proved as a barrier to enter in
Indian insurance sector considering the lack of opportunity to follow risk based pricing. Thus the abolition of tariff regime lifted the barrier to enter Indian general insurance industry.
De-tariffing enabled general insurers to provide new and innovative products. These products enabled auto industry to utilize them to sell vehicles. The new coverage’s provided by insurers resulted in reduction of maintenance cost or easier maintenance for a vehicle owner in case of an accident. Vehicle manufacturers also tied up with the general insurance companies to offer specialized services to their customers like cashless facilities and the tied up insurers also provided them revenue in workshop by agreeing to pay their labor schedules and paint schedules. Such agreement enabled motor dealers to see margins in motor insurance which would not have been the case as a customer would ask for discounts on such schedules straining the margins of the auto dealers.
De-tariffing also enabled the vehicle manufacturers to run free insurance schemes to their customers due to the possibility of reduction in premium which resulted in reduction of on road price of the vehicle. Thus auto industry and the general insurance industry have become extremely interdependent with each other.
De-tariffing also enabled the increase in penetration of insurance against vehicle population which does satisfy a social cause. More number of vehicles plying on the road is now insured and thus enabling the affected party to be satisfied at least monetarily.
De-tariffing has got the industry to grow multifold and thus improving the insurance penetration against GDP in India as discussed earlier in the report.
34
Brief discussion on future of GI in India
Indian general insurance industry has been changing for better during last decade. First liberalized and yet without freedom in pricing and innovation liberalization would not be justified. Hence, de-tariffing was next most important thing to happen. Now that de-tariffing has happened and risk based pricing has become a reality and innovation and improved technical knowhow is there with foreign insurers setting up office in India, the stage is set for future. Some of the factors which can change the industry and some which has to be done to sustain profitability are discussed below.
Digitization
On Sep 16 2013 Insurance repository system was launched which would mean that policy storage will be digitalized in near future. It may not take too long for insurance policies also to be sold through digital platform. Already most of the insurers are offering online insurance policies and we can also see online aggregators available in the market. This distribution channel will grow to be one of the largest in future as the younger generation would be more tech savvy and rely on digital platform like smart phones and tablets rather than on individual agents as the digital platform would allow them to evaluate the options more judiciously. This would mean reduction in distribution cost for the insurance industry and hence the insurance industry might also dematize. With digital platform growing traditional distribution channels might find it difficult to sustain in future.
Rural market penetration
The penetration level in urban India being much higher than the rural India it may be difficult for insurance companies to grow and the premium rates might come under tremendous stress due to heavy competition in the GI industry in urban India. It may be prudent to figure out a strong channel of distribution which can allow tapping rural market. Probably the industry might look at developing nontraditional channels like grocery stores or a supermarket to distribute the pre underwritten products. This would require insurance industry to develop new underwriting methods, improved training and change in mindset. Insurance companies venturing in rural markets might look at better margins due to lack of competition which is prevailing in urban
India.
Claims Process
It would be prudent for insurance companies to look at innovative ways of settling claims in quickest manner. As digitization is imminent it would be very important for insurance companies to have a strong brand to survive in the industry. Certain process like immediate negotiated claim settlement without any repair documents for simple or small claims and on account payments for bigger claims in motor insurance would allow insurance companies not to depend on motor dealers or garages for cashless facilities and pay very high charges against labor and paint to save
35
such tie ups. This would make the life of insurance companies simpler and reduce average claim cost enabling profitability.
Improved penetration in vehicle population
The growth of auto industry is looking quite slow currently. It would be prudent in terms of insurance companies to improve penetration against vehicle population to increase premium income. For this they can look at joining hands with traffic department and ministry of transport departments and get the vehicles compulsorily insured at least for CTP which is mandatory as per the MV Act in India. As discussed earlier only around 1/3rd of the vehicle population is insured and hence this provides a lot of scope for improving penetration. As insurance works on law of large numbers, this might also affect the profitability in positive manner.
Operational excellence
As the insurance premium rates are driven by market forces and not much of control on claims cost, it would be imperative for the insurance industry to work closely on reducing management expenses and commission expenses to achieve profitability. Insurance companies can look at doing away with physical documents and go digital to save cost of maintaining the documents. It would also be possible for insurance industry to make all the retail lines insurance online which will reduce their cost of operation. However, quality check should not be compromised as it may lead to frauds and unwarranted drain by way of claim expenses.
After Liberalization and De-tariffing it is digitization which would be the next change for the industry to encounter. This would mean that the way of working of GI industry would change to a large extent and the distribution of GI products would take a new form. Unlike the first two changes digitization would be more of evolutionary in nature and the insurers who are not equipped with strong systems background would be difficult to cope with.
36
Conclusion
Digitization
De-Tariffing
Liberalization
IRDA was formed to make the insurance industry future ready. Only PSU’s were operating during nationalized era and premium rates were tariffed which was a barrier for innovation and risk based pricing. Both these objectives required insurance industry to be opened up. Thus insurance industry was liberalized and private insurers were allowed to set up offices in India.
However, without any freedom on pricing and new product innovation, private insurers were not able to contribute much to the industry except for process excellence. Hence, it was imperative to de-tariff insurance industry, which would give freedom of pricing and innovation.
The third change for the industry being digitization, it required skilled insurers with greater technical knowhow, hunger for innovation and global knowledge for understanding digitization and lead the industry without any trouble towards digitization. This requirement was taken care by liberalization as foreign insurers were allowed to enter India.
De-tariffing has provided the Indian GI industry a most wanted flexibility to gel with global market in terms of pricing and bringing new GI products to India from global market which can benefit the Indian consumers. De-tariffing has also allowed the Indian general insurance industry to price premium according to the risk that they are accepting which helps the industry to avoid penalizing good customers which was happening during tariff regime. De-tariffing has enabled the Indian GI industry to follow the fundamental principle of insurance which is more the risk more the premium and less the risk -less the premium.
From this report we have understood that loss ratio has not changed much due to de-tariffing.
De-tariffing has already showed that the industry which lacked new product introduction for 4 decades has already introduced more than 10 new products in motor insurance adopted from global markets in such a short span of time. We also understand that the penetration of motor insurance to vehicle population is improving fueling growth. De-tariffing has made foreign insurers interested in Indian market and fueled FDI flow which is of extreme importance at current juncture.
Hence, on a whole de-tariffing has proved to be a catalyst to take Indian GI industry to global standards, well poised for growth and able enough to cope with newly emerging trends.
37
References
1) Annual Reports of IRDA from 2001 to 2012. Reports down loaded from IRDA website.
Last visited on 13/10/2013 8.30 PM http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=AR&mid=11.1 2) Motor portfolio reports of IIB from 2005 – 2006 to 2012 – 2013. Data taken for IIB website. Last visited on 16/08/2013 12.00 PM https://iib.gov.in/IRDA/homePageAction.do?method=loadHomePage 3) Swiss Re World Insurance Report from 2004 to 2012. Reports downloaded from Swiss
Re website. Last visited on 17/08/2013 10.00 AM http://www.swissre.com/sigma/ 4) Cap Gemini Report 2013. Downloaded from website. Last visited on 17/08/2013 10.30
AM.
http://www.capgemini.com/sites/default/files/resource/pdf/wir_2013_0.pdf
5) Notices, Circular and committee reports from IRDA portal. Downloaded from IRDA website. Last visited on 13/10/2013 8.30 PM http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid= 12 http://www.irda.gov.in/Defaulthome.aspx?page=H1 6) Road Transport Book 2011. Downloaded from ministry of road transportation website.
Last visited on 28/09/2013 5.15 PM http://morth.nic.in/index2.asp?slid=291&sublinkid=137&lang=1&key=road%20transport%2 0year%20book&n=1
7) Insurance History from IRDA portal. Last visited on 13/10/2013 8.30 PM. http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2 8) SIAM data for new vehicle sales from 2005 to 2012. Down loaded from SIAM website.
Last visited on 06/06/2013 10.00 AM. http://www.siamindia.com/scripts/domestic-sales-trend.aspx 9) Segment wise premium details from IRDA portal. Last visited on 13/10/2013 8.30 PM. http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_List.aspx?DF=SWDN&mid=3.2.13 38
10) OECD Report 2012 (Global Insurance market trends). Downloaded from website. Last visited on 14/09/2013 http://www.oecd.org/daf/fin/insurance/globalinsurancemarkettrends.htm 11) An analysis of evolution of insurance in India – Tapen Sinha (Institute technologic autonomo de mexico and university of Nottingham report) Downloaded from website.
Last visited on 27/09/2013. http://icpr.itam.mx/papers/IndiaChapter.pdf 12) GIMAR (Global Insurance Market Report) 2012 edition by International association of
Insurance Supervisors. Downloaded from Website.14/09/2013 10.00PM www.iaisweb.org/view/element_href.cfm?src=1/16517.pdf 13) Profitability analysis on Indian general insurance industry Report. Downloaded from website. Last visited on 17/08/2013 10.41 AM http://shodhganga.inflibnet.ac.in/bitstream/10603/2352/14/14_chapter%206.pdf 14) Ernst and Young Report on Motor Insurance. Downloaded from website. Last visited on
17/08/2013 11.05 AM. http://www.ey.com/Publication/vwLUAssets/Motor_Insurance/$FILE/Motor-Insurance.pdf 15) Insurance Act 1938. Downloaded from IRDA website. Last visited on 13/10/2013. http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=ACT&mid=4.1 16) Growth of Indian insurance industry and determinants of solvency report by subir sen,
TERI University. Downloaded from website. Last visited on 15/09/2013 9.58 AM. http://www.oecd.org/daf/fin/49674941.pdf 17) Implication of Motor TP pool and Declined risk pool by anurag rastogi. Downloaded from website last visited on 16/08/2013 2.33 PM http://www.actuariesindia.org/GI/TP%20Pool%20Implications%20CIGI%202011.pdf 18) Committee report on declined risk pool headed by Mr Ramprasad (Chairman)
Downloaded from IRDA portal last visited on 17/08/2013 11.38 AM http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid= 12.
19) Justice Rangarajan committee Report. Downloaded from IRDA portal. Last visited on
13/10/2013.
39
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid=
12
20) Report on distribution channel – Committee report from IRDA portal. Last visited on
13/10/2013
http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=Creport&mid=
12
21) OICA Reports on world motor vehicle usage and manufacturing..Downloaded from website. Last visited on 28/09/2013 6.20 PM. http://www.oica.net/ 22) Automotive Mission Plan report by Ministry of heavy industries and public enterprises.
Downloaded from website. Last visited on 28/09/6.20 PM. http://www.siamindia.com/upload/amp.pdf Methodology
1) The penetration data extracted from Swiss Re world insurance reports and used for analysis. 2) The density data was extracted from Swiss Re world insurance reports and used for analysis. 3) GWP of GI Industry was extracted from IRDA annual report and used for analysis.
4) Segment wise GWP was extracted from IRDA portal for past 3 years and used to analyze the last 3 years segment wise share of GWP and its growth.
5) Segment wise loss ratios were extracted from the annual report for previous 3 years and used for analysis.
6) Profit before tax data for past 5 years was extracted from the IRDA annual report for past
5 years and used for analysis.
7) GWP of both PSU and PVT insurers were extracted from the IRDA annual report from
1999 to 2012 and used for analysis of the growth of and ratio of PSU and PVT insurers in the GI industry.
8) Last 3 years data on channel wise GWP and NOP was extracted from the annual report of
IRDA and used for analysis of distribution in GI industry.
9) The vehicle population details were extracted from the road transport book issued by ministry of road transportation and used for analysis on increase of vehicle population.
10) TP pool LR and ULR data was extracted from committee report on declined risk pool available in IRDA portal and used for analysis and understanding the mode of operation of TP pool and declined risk pool
40
11) The data from IIB portal on GWP premium, NOP issued, Number of incurred claims and
Incurred claim amount was extracted from 2005 – 2006 to 2012 – 2013 and used for extracting the various premium ticket size trend to understand the impact of de-tariffing both OD and TP premium. While computing premium ticket size the policies in others class was not considered as they are motor trade risk policies.
12) The same data of IIB was used to find ACC, Frequency, LR on GWP against incurred claims for OD and TP portfolio with overall motor portfolio.
13) Motor LR on NEP and Industry LR on NEP was extracted from IRDA annual report.
14) The profitability analysis data was also extracted from IRDA annual report and the same was analyzed.
15) Motor OD Vs TP GWP was extracted from the IIB data and the growth was analyzed.
16) Motor premium growth, Insurance industry growth and the auto industry growth was analysed with the IIB data for motor insurance growth, IRDA annual report data for GI industry growth and the SIAM data for auto industry growth was used. SIAM data did not have the 2012 – 2013 data and hence the same was left blank.
17) Penetration of insurance against vehicle population was done by using IIB data on NOP,
Road transport book for vehicle population till 2011 and SIAM data was used to add the
2012 sold vehicle to vehicle population and the penetration was analyzed.
18) Equity capital of PVT insurers, PSU’s and the FDI data was extracted from the annual report of IRDA and used for analysis of increase in FDI and requirement of excess capital was analysed.
19) Future of GI industry was based on the current trend and the recent article on policy digitalization and insurance repositories were used and extrapolated with own interpretation. 20) Apart from this the theoretical knowledge was obtained from reading various reports, articles, annual reports of IRDA and various committee reports.
21) While calculating the NOP penetration to Vehicle population, motor policies in others class was not considered as they are motor trade risk policies which cease to exist as soon as the vehicle is sold to a customer by the motor dealer.
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