The Fire Insurance portfolio of all General Insurers in India was right from the beginning for all time considered as a profit generating assortment. All insurers knew that Fire Line of Business is always giving the cream of profit, as the moral or morale hazards are normally absent in the Fire Insurance selling and no one considers to burn his own property to fetch some financial benefit from his fire insurance policies, as there exists a Policy Excess of 5% of the claim amount subject to minimum of Rs. 10, 000/- or more depending on the Sum Insured of the policy, always to be applicable for all fire claims (except for the dwellings). So, whatever amounts are eligible for payments to be made by the insurers’ under the affected Fire Policies, those basic amounts of excess need to be always mandatorily be borne by the insured in each such claims.
But from the dangerous trend of lucrative discounts being offered by the insurers, mainly to the corporate clients, in the cut-throat & unhealthy competition existed in the de-tariffed regime of Indian General Insurance Sector, the premium base of the Fire Portfolio thus become a skeleton. It is a joke prevailed in the market at the backdrop of last few years’ Fire Insurance operations, an insured availing 99.999…%, when asked for further discount from the insurer – the underwriter replied “We are ready to allow 100% but that ensures no payment of premium from you side – which means – no policy may to be issued. Well, will you be happy in such situation?”
Even situation was so bleak, that insurers started accepting 100% discount in Basic Fire Premium along with collection of full premium on STFI, Earthquake (as add-on cover) perils – as no discount being applicable for these AOG Perils. Although in the Fire insurance retail markets, the discounts allowed by the Indian insurers were relatively low – but the charm of underwriting the Fire Line of Business in so doing, simply vanished.
Even no satisfactory answer was available from the Secretary General of General Insurance Council, Mumbai – when that respected person was asked by the author, “How to manage this unnecessary ruining of Fire Premium base?”, in the open session of one Seminar organized at Hotel Taj Seminar Hall in Mumbai, a few years back (being organized by an well-known Magazine House) – but no satisfactory reply was then available from him.
2. SITUATION THAT PREVAILED IN GENERAL INSURANCE MARKET IN INDIA:
The operational expense ratio of the Indian non-life industry deteriorated despite already being the highest globally. This deterioration was evident among both Indian public and private insurers. Operational expenses increased as insurance players continued to invest in the expansion of their business and to compete absolutely being in a severe cut-throat competition with the international players in this market, as India’s Insurance Regulatory and Development Authority of India (IRDAI) had contemplated an increase in the limit on foreign direct investment in insurers to 49% long back about almost ten years ago. The effect is, if global players acquire larger stakes in domestic operations, it could lead to more widespread adoption of best practices, and resultant operational efficiencies in the long run. The acquisition ratio of India’s non-life insurers declined as new and low-cost distribution channels emerged, especially among private-sector providers, where acquisition costs are lower than that existing amongst public insurers. Investment ratios— the return on insurers’ investment portfolios — are declined heavily. Since the financial crisis, insurers have been more conservative in their investments amidst ongoing uncertainty in world markets and weaknesses in macroeconomic conditions. The European debt crisis injected further volatility into financial markets after the outbreak of Corona Virus currently.
As the result of market and economic uncertainty on several counts, insurers generally become more heavily invested in fixed-income securities and bonds, despite the prevailing low interest yields, and have far less exposure to equities than before the crisis. This approach keeps returns low, and limits insurers’ exposure to the upside of equities gains, but it is not likely to remain the favoured stance for them. Profit margins for non-life insurers declined broadly since de-tariffing, despite efforts to improve operational efficiency, because gains in underwriting performance were not sufficient to offset dilapidated investment returns. As such all non-life insurers are focused on reducing operational costs and raising efficiency, but market-specific conditions continue to be the single most important factor. With investment income likely to be limited for the foreseeable future, and many insurers already trying to make routine activities as efficient as possible, business acquisition costs are likely to be the next target for non-life insurers seeking to improve their profitability. Agents and brokers remain ubiquitous in most of the markets, so any significant reduction in acquisition costs is likely to emerge only as the use of direct channels being more ubiquitous in India.
Global Efficiency-Ratio Model showed Indian Non-Life Claim Ratios were significantly hit hard by Catastrophe Claims for the last decade. To analyze the specifics of performance, insurers used the Efficiency Ratio Model to calculate efficiency ratios [expense and profit metrics against gross written premiums (GWP)] for major players in each market, and to analyze broad industry performance trends by market accordingly.
The operational ratio in some insurance companies improved, albeit very slightly, as insurers continued to invest in productivity improvements despite rising claim levels, and are starting to see the benefits of productivity investments. Insurers had been slow to make such investments as they faced significant competitive pressure and very low profits. However, investment became necessary as existing systems were aging, and needed to be overhauled or replaced. System upgrades have led to efficiencies, but the industry is still only part of the way through the updating process. Acquisition ratios are changing very little with only a fraction of customers using direct distribution networks. However, insurers are undertaking widespread efforts to increase the use of direct distribution networks, and customers are beginning to opt for new and alternative channels, such as Internet and mobile. This is helping insurers to increase their reach, and enhance customer satisfaction, but distribution costs often remain high.
Mainly the positive aspect for the Fire Line of Business is that the Indian Fire Reinsurance Market remained always very lucrative for the Reinsurers and Reinsurance support for the Fire Portfolio covering for Indian Properties are very structured. Proportional Reinsurance products like Quota share & Surplus – both are available from the Reinsurers of Indian Market even thereby allowing the profit commission by the reinsurers to the cedent. In such situation to make the Fire Portfolio profitable again an initiation is taken & as evidenced by the introduction of uniform Fire Rating by all the insurers.
3. INTRODUCTION OF NEW TARIFF IN FIRE INSURANCE IS SIGNIFICANT POSITIVE MOVE:
Tariff firstly came back during the last quarter of 2016-17 for the risk above Rs. 500 Crores (PD + BI) in a single location involving following Mega 12 risks as below:
- Thermal Power Plant;
- Combined Cycle Power Plant;
- Automobile Industries;
- Chemical – Fertilizers;
- IT / Software;
- Aluminum / Copper / Zinc.
During December, 2019 GIC Re had issued Fresh Mid Term endorsements dated 10/12/2019 to Indian Insurers’ PROPERTY Reinsurance Treaties – mandating compliance of following underwriting practices in Fire department for Polices of SFSP / IAR / Mega Risk commencing on or after 01/01/2020.
- Fixed Flexa Rating Regime for All Occupancies of AIFT:
- FLEXA Rates for All occupancies of AIFT shall be the FLEXA Loss Cost Rates published by Insurance Information Bureau of India (IIB) vide Schedule 3 dated 21st November 2019 or any future revision to these rates by IIB. There shall be No Discount allowed on these FLEXA Rates published by Insurance Information Bureau of India (IIB). This IIB FLEXA Loss Cost Schedule 3 contains the detailed description in the following columns:
|Sr. No.||IIB Occupancy Code||IIB Occupancy Description||Loss Cost|
- covering all Fire Risks being depicted in same fashion as per the erstwhile AIFT / Guide Rates as:
SEC III – Dwellings/Offices/Hotels/Shops, etc., located outside the compounds of Industrial / Mfg. Risks;
SECTION IV – Industrial / Manufacturing Risks;
SEC V – Utilities outside the Compounds of Industrial / Manufacturing Risks;
SEC VI– Storage Risks outside the Compounds of Industrial / Manufacturing Risks;
SEC VII–Tank firms / Gas Holders outside the Compound of Industrial / Manufacturing Risks.
- It may be recalled that Insurance Information Bureau of India, which is an organ of IRDAI, has been publishing Flexa Loss Costs (Burning Costs) since 2015, once in every two years, for various Risk Occupancies, based on entire industry level data collected from Indian Insurers and they reflect the Uniform Pricing needed for each of the occupancies. The Loss costs indicated in IIB schedules are pure Flexa costs and do not include STFI price.
- IIB- Flexa Rates have been in use for 8 Occupancies (36 Risk codes of erstwhile All India Fire Tariff) based on an earlier mandate by GIC Re effective 01st March 2019 and now this practice extends to complete Risk List of Erstwhile All India Fire Tariff.
- Following the decision to implement the IIB module of Rates only for all occupancies in Fire department from 1st January 2020, Insurers’ current practice of using different versions of Fire Rates viz. In-house Guide Rates / Discounted Erstwhile AIFT Rates / Individual Insurance Company’s Loss Costs Rates – all will be absolutely discontinued.
- The Rating Logic of All Occupancies: The Premium /Policy Rate calculation in respect of All the Risks/(s) occupancies shall be as under:
- FLEXA Rates shall be as per IIB Schedules, which ever are current and shall be without any discount.
- Natural Catastrophe NATCAT (STFI/EQ) rates without any discount, wherever NATCAT cover is opted for.
- In case of IAR / Mega Policies the following Minimum Rates are to be additionally charged.
|MBD||0.25 per mille|
|MLOP||1 per mille *||* Rates are irrespective of indemnity periods|
|FLOP||100% of Fire rate* charged (i.e. 11B + NAT
CAT or IIB Rate)
3. The Total Rate so arrived i.e., (item a+ item b+ item c) may be further appropriately loaded with Company’s Procurement / Management expenses or any other relevant cost to arrive at Final Rate – that means the rates given by IIB now is to be mandatorily applicable to all Fire Insurers operating in Indian market and is the bare minimum.
- Characteristics of Schedule 3 of Insurance Information Bureau of India (IIB) FLEXA Loss Cost schedule are given as below:
- IIB has published the latest version of FLEXA Loss Costs Viz Schedule 3 vide their Release dated 21st November 2019 with validity from 1st December 2019 and it superseded their all earlier versions.
- The IIB, in the Schedule 3, split/demerged some of the AIFT occupancies into multiple Risk codes responding to Industry’s needs and availability of data. As a result, there will be now 7 Risk Codes for Electric Generation stations as against only 2 of Erstwhile AIFT and 9 Risk codes for Engineering Workshop as against only 2 recognized under Erstwhile AIFT.
- The current schedule 3 expanded it to 291 occupancies thus discovering Rates for almost all of Erstwhile AIFT Risk Codes. IIB but could not publish Rates for only 8 numbers of occupancies of AIFT due to inadequate data. GIC Re, however, notified rates for those missing 8 also by aligning the rates of Risks having similar hazard profile. Thus the IIB FLEXA Loss Cost schedule in all has contained the Rates for 299 Occupancies as against 237 of Erstwhile AIFT.
- General Provisions:
- Applicability of Minimum NATCAT Pricing : If the Insured wants to delete STFI or EQ or both , it can be allowed but the Policy Rate in such cases shall not be less than the applicable NATCAT i.e. (STFI+EQ) price.
- Advancement of Policies expiring on or after 1st January 2020 to a prior date in December 2019 , to derive current discounting practices ,either as Premature renewal with cancellation / without cancellation as a parallel policy to the existing policy as a fresh Policy suppressing the renewal information; is barred. It can be allowed if fully compliant to above new pricing practice.
- Breach of any of the above regulations in any Policy bars its cession into RI treaties.
These changes had been brought to the notice of all the Operating Offices of all the Insurers immediately, for their notice, implementation & strict compliance.
- Further Changes in Fire Underwriting brought under GIC Re Mid Term Treaty Endorsement dated 11/02/2020:
GIC Re has notified a further set of amendments to Fire Underwriting, to be valid from 15th February 2020, which is reproduced below:
- In IAR Policies, there shall be No option to the Client to delete NATCAT i.e., STFI &/or EQ.
- In SFSP Policies, NATCAT Perils can be deleted subject to charging Minimum NATCAT price for the Policy. The Minimum NATCAT price shall mean; STFI – as applicable for the Risk and EQ – as applicable to the Risk & EQ Zone.
- In respect of Long Term SFSP Policies for Dwellings under Method— B, long term discount is now restricted only to FLEXA Rate which shall be drawn from IIB Schedule. Hence both STFI and EQ rates are not eligible for long term discounting.
- A Risk will be treated as Composite Textile Mills (Code 2211 – being newly introduced) if processes from Blow Room to Cloth Processing are involved therein.
- Minimum NATCAT Price shall be as under for the following Risks. The EQ Rate shall be charged as under irrespective zone IV/III/II/I or multi-zone cross country.
|Sl. No||Risk||Minimum NATCAT Price In Mille|
|1||Roads||STFI fixed at 1.50+ EQ –||0.225|
|2||Pipelines||STFI fixed at 1.50+ EQ –||0.225|
|3||Railway Tracks||STFI fixed at 1.50 + EQ-||0.225|
|4||Lines||STFI fixed at 1.50 + EQ-||0.225|
|5||Cellular Network Policies||STFI fixed at 1.50 + EQ-||0.225|
|6||Residential Colonies, Home welfare associations,
Cooperative Societies , Dwellings owned by the
|STFI 0.15 + EQ – As per Zone|
- A few Risks/Occupancies which were missed out in IIB’s initial Schedule 3 are now assigned with appropriate IIB Codes as detailed under:
|S No||Risk Description||Applicable||IIB Code & Rate|
|1||Shopping Complex having Multiplex||2229 & Re.0.77 Per Mille|
|2||Multi occupancy Industrial Estate Buildings||2229 & Re.0.77 Per Mille|
|3||Cellular Networks Policies||3014 & Re. 0.52 Per Mille|
NB 1: Risks in Multiple Occupancy Industrial Estate shall be rated ‘per se’
NB 2: If the entire building of the Industrial Estate is insured under one Sum insured FLEXA Rate applicable shall be as above.
Since all the insurers – both private and public sector players, have to abide by this new tariff by offering the minimum fire rate as stipulated in this tariff, the author is incorrigibly optimist that this reintroduction of Fire Tariff will immediately stop the severe cut-throat and unhealthy competition and thereby giving a sustainable future for Indian insurers and bring back the glory of Indian Fire Insurance Portfolio.