Detariffing of General insurance in 2007 was the biggest challenge for the industry and the game changer that identified the winners of the future.
The Tariff was statutory for the larger classes of General insurance in India from 1968 till 2007. Fire and Motor were the largest businesses under tariff. There was a certain stability both for the insurer and the insured in a tariff regime, provided there was flexibility to periodically adjust rates according to loss trends.
Revising the Motor Tariff was always a sensitive issue, but a bad situation turned distinctly worse in 1988 when the Motor Vehicles Act, 1938 was amended. It made liability in the Motor Third Party cover unlimited, lifted the Statute of Limitations and allowed cases to be filed in any location.
The Fire Tariff was perceived to be very high compared to the loss ratio, but since the corporate customer was a sophisticated one, the system settled down with insurers offering group hospitalisation policies, a non-tariff cover, priced to offset the high Fire premium rate. Thus, the pricing for both was distorted.
In a detariffed market, prices find their true levels and this is fair to the customer. In April 2007, most classes of General insurance business were detariffed by the Insurance Regulatory and Development Authority (IRDA). The exception was Motor Third Party Liability insurance premium rates, which was brought under IRDA.
Fire insurance premium involved large clients and big premium tags and so all eyes were on the new tariffs to be decided by each company approved by their Boards. When the Tariff was removed, the Fire premium rates dropped steeply.
However, "the fall was from an unrealistically high tariff rate compared to the Claims Ratio, which was low", says S V Mony, former Chairman cum Managing Director of New India who later became Chairman of General Insurance Corporation of India.
