The Indian insurance industry faces multiple challenges today. One of them is the issues involved in moving from a tariff to a detariff market. The last experience, when marine insurance was detariffed in 1994, was horrendous for the industry. The general insurance industry had no clued what awaited them. Premium rates touched unrealistically low levels, leaving the industry reeling for years and dying under suicidal competition threat. The market cannot afford a similar experience.
Insurers, especially the smaller players now fear the move into detariff zone. The reason, first and foremost being the Indian market does not have reliable, sufficient and detailed data required for actuarial analysis and pricing. Rating, based on limited data could mean a repeat of the 1994 experience. Preferential rating would not be possible. Thus clients, with a claim free track record are clubbed with those having a poor claim record. In a growing competitive environment, can insurers afford to offer a uniform rate to all? Growing insurance awareness brings with it a discerning insuring public who do not accept the ‘one rate fits all’ policy any longer.
If one were to look at the history of the Indian insurance industry, major landmarks have taken place in every other decade starting from the 1930s till the end of the last century. It was in 1938 the Insurance Act setting the rules and regulations for the insurance market were passed. In 1956 the Life Insurance Act was passed giving birth to the Life Insurance Corporation of India (LIC). In 1972, the General Insurance Business Nationalization Act was passed nationalizing all general insurance companies and organizing them into four subsidiaries of the General Insurance Corporation of India (GIC). In 1999, Insurance Regulatory and Development Authority (IRDA) Act was passed, opening up the industry to Private Indian and foreign participation. The recent changes being the IIB rates catering to the entire occupancies of Fire line of business and the sand box regulations promoting new and dynamic inventions in this field.
The market has evolved with each of these legislations. Insurance is a long- term business and it takes a while for the market to mature and support the economic growth of the country. But can the Indian market wait for another two decades for development of essential support agencies to take place? What does the market require to aid companies in a competitive, regulated and open market environment?
The market today is getting fragmented with the entry of new insurance providers. As far as the private insurers are concerned, at this stage their premium turnover is too small to be taken as base for actuarial exercise. The Public sector companies have a wealth of legacy data, which lies in various dockets in India. Collecting and collating them for meaningful analyses at the time of detariffing motor and other products is not an impossible task but is extremely time consuming, difficult and expensive. The question is who will foot the bell for this initiative?
What is the way out for India? A possible road map for India to move to a market experience based rating is to begin aggregating market data immediately. A market aggregator collects and aggregates detailed data from all the insurance companies and offers consolidated data back to the companies. This helps in better pricing, improved market segmentation, optimum reserve creation for unexpired risks and assists in product design.
A market aggregator collects policy and claims information from all the insurance companies in the market and consolidates the data. This is a highly specialized job. With the huge database at their disposal Market Data Aggregating Agencies (MDAA) can design policy coverage, analyze trends and provide other data related services. The market gets to use consistent and sufficiently large data. This makes pricing a lot more accurate and enables insurers to offer preferential ratings. Besides pure actuarial data an MDAA could offer policy wordings, new product designs, possible rating structures and underwriting rules.
This saves the industry valuable resources and time. Individual companies would have to duplicate the task at an incremental price. Experts in the statistical, actuarial and technology fields can be hired for the market as a whole. The best of talents can be afforded because of shared costs.
MDAAs help not only the insurers and regulators but also the customers who would have the confidence that they are priced at an accurate rate based on past claim history and risk profile. The lag time between filing products with the IRDA and getting an approval is kept to a minimum of 30 days (file and use period) since objections from the regulatory angle would be preempted. As an alternative the MDAA could apply for approval from the IRDA and offer an approved product for insurers to launch quickly.
Companies’ ability to respond suitably to the dynamics of the market, meeting regulatory, statutory and legal requirements could be possible with the least turnaround time. This would be the base product. Companies using this service could of course modify the ‘vanilla’ product to suit their company specific requirements. This being a purely statistical exercise a large population size coupled with detailed data means better predictions. Predictions based on market data are a lot more accurate than they it would be if based on data of a single company. In a developing market like India it is all the more true, especially for the new entrants who together have a market share of around 10 per cent. Besides, information for a particular line of business, which is new to the company, can be approached more confidently, armed with accurate market experience. This is true even in a large market like the US, where most insurance companies use the products and services provided by the market aggregator, Insurance Services Office (ISO).
The Insurance Services Office (ISO), a thirty two year old organization in the US, is a popular provider of state approved property and casualty products and services. They hire fellows and associates from the Casualty Actuarial Society (CAS), Certified Property & Casualty Underwriters (CPCU) as well as certified professionals from Insurance Data Management Association (IDMA). They are also supported by legal, government and regulatory experts who analyze the effects of changing legislations and regulations on the business. ISO provides standardized wordings and coverage based on years of market data. This can either be used as is or companies can modify them to suit their own requirements. Everyone, insurers, intermediaries and clients, benefit from ISO with reduced costs, prevent fraud and support competition by providing comparative information to aid decision-making.
What can IRDA do? IRDA has two major roles to play, development of the insurance market and protection of policyholders’ interest. IRDA can facilitate the setting up of an MDAA. Regulations require that certain data be submitted to the Authority. But a lot more detailed data is required to be aggregated. This initiative has to begin immediately, when the operations are small and easy to manage and maintain. This way IRDA and the insurance companies become privy to aggregated data. This could be handled by an external agency with proper credentials and resources and enjoying IRDA’s confidence. This being a purely statistical exercise a large population size coupled with detailed data means better predictions. Predictions based on market data are a lot more accurate than they would be if based on data of a single company.
In India the patronage of IRDA is required at this stage because nobody else is going to be able to manage and invest in such a venture. This will definitely go on to be a self-sustaining
Proposition being funded by the insurance entities through a fee on products and data. There is no question about the confidentiality of the data being published because these will be generic summarized data and not individual case history. For example, the MDAA will aggregate data on motor vehicles insured in terms of models, makes, seating capacity, driver profile and so on. The rate approval function of the IRDA would be a lot easier and meaningful if it had access to authentic actuarial data. What are the benefits that the Indian market can look forward to with an MDAA?
In conclusion, the Indian insurance industry could get a boost with access to detailed, accurate market data both historical and current. It is important that this initiative is supported all the way by all the participants.