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Come January 2007 and non life insurance sector will witness detariffing. A lot of questions running in the mind of consumers seeking answers to how it will prove beneficial to them. Lets try and understand what detariffing brings to common people like us.
Detariffing, also called, as free pricing regime will bring motor, fire and engineering insurance under its ambit. It would mean that the range of cover, pricing, degree of customization, etc. would undergo major change as far as premium payment is concerned. The premium charges will be influenced by factors such as age, experience and even educational qualification. This will help in determining how much risk an individual is willing to take. And as far as free pricing of motor insurance is concerned, the premium charged will differ in line with the vehicles' make and usage.
An example should make it easier to understand. Supposing that Mrs. Rao owns a car lets say Maruti Zen and makes use of it to commute to office and back home, which is an hour drive to and fro. The usage increases on weekends when she goes out with her family for pleasure trips. And on the other hand, Mr. Patil, a cab driver uses his cab for more than 15 hours in a day. The premiums in both the cases would differ. Mr. Patil will have to pay more premium compared to Mrs. Rao as the former runs more into the risk of meeting accidents.
The example cited above clearly shows that here onwards, the insurance companies would price the products depending on host of factors like mentioned above which would include age, make of the car, etc. Specifically speaking, the premium charges will reduce if the vehicle has air bags, warning mechanism on malfunctioning of the vehicle, automatic door locking system, etc. But on the other hand with free pricing regime, the third party liability premiums will also increase. Following which, car owners will have to pay premia, which will be comparatively less than the transporters whose premiums will shoot up to more than 150%. Insurance Regulatory and Development Authority (IRDA) has drafted a framework of premium rates that will be applicable to vehicles depending on the engine capacity.
IRDA has also introduced a pooling arrangement (similar to a terrorism cover pool) for the motor third party insurance business. It has asked general insurers and reinsurers to chip in keenly in the pooling arrangement that will even out the insurance business underwritten. If one had to take a look on the other side of the picture, industry sources point out that motor insurance industry is a loss-making portfolio and with the free pricing, the industry will have to compromise with the profits. On a large-scale scenario, detariffing has left the global reinsurers apprehensive about its consequences. It is expected that insurers will suffer from high loss ratios as witnessed in Germany when detariffing took place. The world's leading reinsurer - Munich Re has indicated to withdraw its support to the insurance companies if the fall in prices is radical.
From the overseas past experiences, it is believed that the market may behave in an erratic manner once detariffing comes in, insurers will have to factor in pricing, claim handling, distribution, etc., which would change accordingly. Countries like Italy have not really benefited from the detariffing. However, the situation was vice versa in Japan that gained market share with different rates for motor policies when detariffing entered.
All said and done, the reasoning for paying premiums becomes rational and logical to a layman. The free pricing of fire, engineering and especially motor insurance is expected to do good and it is likely to work out in the favour of lay people.
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