Detariffication in India (PART II)

According to Dalip Verma, managing director of Tata AIG General Insurance Company,  presently, almost all constituencies of the insurance market including consumers (corporate as well as individual) and also insurance players are mooting for a detariffed regime so that cross-subsidization of risk mitigation is avoided. Detariffication rates has caused a virtual price war in certain lines of business thereby resulting in an adverse impact on profitability. Loss ratios progressively worsen. Before we observe on the impact of detariffication in India, let us look at the annual growth of all private companies in India with Fire and All Other lines which is shown in the line graph below.

We observe impact of detariffication on different major classes of general insurance in India.

1. Motor - The impact of detariffications are Own Damage(OD) premiums declined substantially by 20% – 60% and Third Party Liability(TPL) is still under an inadequate tariff. The Motor TP Pool set up for Commercial TPL policies have a poor loss experience as all the companies have to participate and share in the losses in proportion to their written premiums in the country.

2. Fire - Free pricing leads to a dramatic decline in the premiums for fire policies. According to the annual growth line graph above, the premium growth for private companies fell from over 60% in 2004 to around negative 20% in 2008. Fire policy was no longer able to cross-subsidize the results of other classes.

3. Marine - Coverage price fell steadily after rate of relaxations were allowed. 

Now, let us look into the comparison of detariffication among Malaysia, India and China. In general, we can observe that huge losses were incurred by insurers in India and China which led to re-tariffication of general insurance after detariffication took place. In contrast, since Malaysia is said to be more strategically and better placed in the market with the Risk Based Capital(RBC) which has been discussed in the previous post, Malaysia might have a different detariffication experience as compared to the other two countries which underwent detariffication. The RBC framework could reduce the intensity of price wars in Malaysia.

Furthermore, insurers from India and China experienced huge losses due to unhealthy competition between the insurers which continuously compete in price wars. On the other hand, Malaysia is more likely to benefit from the detarification situation as opposed to the other two countries. This is because appropriate precautions can be taken to encounter the same experience faced by India and China.

REFERENCES

Coby, P. A. (2006, November). On the Threshold: The Modern Insurance Market of India.

Retrieved 19^TH March 2016 from

https://www.cpcusociety.org/sites/dev.aicpcu.org/files/IQNov06.pdf

Subramnian, V. (2011, December 8). IMPACT OF DE-TARIFFICATION ON PROFITABILITY OF NON-LIFE INSURERS.
Retrieved 19^TH March 2016 from http://www.actuariesindia.org/GI/V.%20Subramanian.pdf

Zanolini, L. (2015, June). 5th MITBA CEO Conference De-tariffication in Malaysia – The Road Ahead for Our Industry. Retrieved 19^TH March 2016 from

http://www.mitba.org.my/getattachment/Media-Events/Media-Overview/MITBA-CEO-Conference-%E2%80%93-Seoul-%E2%80%93-2015/MITBA-CEO-Conf-2015-QBE-Detariffication-in-Malaysia-The-Road-Ahead-for-Our-Industry-(1).pdf.aspx

Detariffication in India (PART I)

India is the fifth largest general insurance market in Asia with annual premium of $6.3 million in 2009. Tariff Advisory Committee (TAC) set up in 1968 to provide rates to the industry. Motor insurance forms the bulk of India general insurers’gross premiums (about 44%) as shown in the pie chart below which is the same as Malaysia and China’s insurance market. In recent years, a large growth in premium volumes has been driven by growth in the Motor, Health and Personal Accident lines. It can be expected that other lines will also become more significant as economic conditions develop further. Engineering has emerged as a profitable line since the removal of tariffs with all infrastructure projects requiring mandatory engineering cover. It is an evidence that although premium rates have decreased since the removal of tariffs, premium volumes have not, indicating an increase in the business volumes across the industry

.

Detariffictaion in India implemented by the Regulator in a phased manner with three phases. Phase 1 is implemented with withdrawal of premium pricing restrictions.From 1 Jan 2007 to 1 Jan 2009, insurers of India were permitted to structure the premium rates, in which they can make variation in prices within 20% range of tariff rates, subject to prior regulatory filing and approval of proposed rates under File & Use process. However, they were not allowed to vary the coverage, terms, conditions and policy wordings which lead to no flexibility in altering the tariff defined product. Based on the table below, we can see the detariffication process enhanced from detariffed Marine Cargo in 1994, to detariffed Marine Hull in 2005 and then Fire, Engineering and Auto Own Damage segment in 2007.

Aviation	Aviation	Aviation
Liability	Liability	Liability
Personal Accident & Health	Personal Accident & Health	Personal Accident & Health
Marine Cargo	Marine Cargo	Marine Cargo
Marine Hull	Marine Hull	Marine Hull
Fire	Fire	Fire
Engineering	Engineering	Engineering
Auto OD	Auto OD	Auto OD
Auto TP	Auto TP	Auto TP

         1994                  April 2005                  January 2007

Detariffed

Tariffed

In Phase 2, some terms and conditions of detariffication has been reduced from 1 Jan 2009. For example, insurers are allowed to file variations in deductibles and coverage amounts with appropriate additional premium. In this phase, there is flexibility in terms of breadth of coverage compared to subject of no flexibility in phase 1. Restriction of 20% range variation has been removed. Phase 3 occurred by removing of restriction in alteration of products. In this case, insurers have more freedom in product design. Besides, opportunities are given for migrating to risk based pricing.

Generally, Motor, Fire, Engineering and Workers’ Compensation classes of India’s General Insurance sector used to be governed by various respective tariffs. All the tariffs were removed, except mandatory Motor Third Party(TP) Liability, effective 1 April 2007 whereby the Motor TP risk continues to be governed. In fact, regulators decided to set up India Motor (TP) Pool for Commercial Vehicles (CVs) in which all licensed General insurance companies were required to participate, subscribing to the extent of their respective market shares.

REFERENCES

Coby, P. A. (2006, November). On the Threshold: The Modern Insurance Market of India.

Retrieved 19^TH March 2016 from

https://www.cpcusociety.org/sites/dev.aicpcu.org/files/IQNov06.pdf

Subramnian, V. (2011, December 8). IMPACT OF DE-TARIFFICATION ON PROFITABILITY OF NON-LIFE INSURERS.
Retrieved 19^TH March 2016 from http://www.actuariesindia.org/GI/V.%20Subramanian.pdf

Zanolini, L. (2015, June). 5th MITBA CEO Conference De-tariffication in Malaysia – The Road Ahead for Our Industry. Retrieved 19^TH March 2016 from

http://www.mitba.org.my/getattachment/Media-Events/Media-Overview/MITBA-CEO-Conference-%E2%80%93-Seoul-%E2%80%93-2015/MITBA-CEO-Conf-2015-QBE-Detariffication-in-Malaysia-The-Road-Ahead-for-Our-Industry-(1).pdf.aspx

Tariff Theory by Paavo Pitkanen, Finland

Introduction

            From International Risk Management Institute, tariff refers to rates and coverages set and published by the rating party with jurisdiction. The rating party may be moderated, and controlled either by a company association or a government body. When an insurance company accepts new insurance or there are changes in the premiums on earlier insurance due to renewal, the insurance company has to determine the factors that influence the premiums and calculate the premium according to the values of the factors. To do that, the company gathers data of the factors that eventually influence the amount of claims. Few general principles have to be fulfilled when the company calculates the tariff based on these data; the tariff has to be as correct as possible in relation to different risk groups. Next, the structure of tariff along with the calculation of the premium is quite straightforward. Thus, the factors influencing the tariff have to be few enough and its structure has to be simple, for example, linear or multiplicative function of the factors or rather easy to be expressed in tabular form. Normally, these principles are contradictory; if the premium is correct and accurate, the structure of the tariff is not simple.

Formulation of the problem

            As claims are contingent, we shall assume the total amount of claims on a certain risk period as random variable. To calculate the tariff, we will have to gather both qualitative and quantitative variables which may have an influence on the amount of claims. For example, in motor insurance, variables could be area where vehicle is driven, sex, engine’s stroke capacity, age of vehicle, etc.

1.      The selection problem

            From these possible risk variables, we must select the variables that have significant influence on the amount of claims, thus we will call them tariff variables or tariff factors. The most difficult part is choosing and specifying the tariff variables which have the significant influence and the values.

            If the structure of tariff is given, and the possible tariff variables are quantitative, the tariff variables can then be determine using the step-wise regression analysis, and it is also possible to calculate the tariff at the same time. The given tariff structure also naturally influences the selection of the tariff variables. A better procedure is try to select the tariff variables without any previous assumptions about the structure, then the objective is finding the best construction model, the parameters of which are decided according to several methods: least squares, Chi-Square minimum, modified Chi-Square and moment method.

            Next, we will look into the degree of influence in each possible tariff factors. For example, we expect more accidents will occur in winter than in summer, thus the risk in winter should be higher than summer, thus seasonality is has high degree of influence here.

            Lastly, the selection of tariff variables is done one by one. For each selection, the influence of the previous selected variables is taken into consideration. The most difficult part is measuring the significance of the influence of the different variables.

2.      Tariff construction problem

            Here, we have to calculate the premium as function of tariff variables chosen. To do this, we will first have to search for tariff factors and then construct the tariff. Research in tariff theory usually deals with this problem. The most common tariff models are multiplicative models or sum models.

Risk premium and collective premium

            After the selection problem had been solved, we can identify risks individually using the value tariff variables and combine these values together. According to Bühlmann’s practice, we can make several definitions:

i.                     The risk premium is the premium corresponding to the combination values of the tariff variables and thus defined for each value combination separately.

ii.                   The collective premium is the combine premium with calculation based on different value combination of the different tariff factors. In practice, using all of the tariff variables is usually deemed difficult. Correspondingly, if some of the variables can have many different values, it is preferable to classify the values into few classes where risks belonging to a certain class will have the same premium, which is the collective one. In practice, all insurance premiums can be considered as collective premiums, because not all tariff variables can be counted as factors influencing the premium. Thus, the collective premium depends on the distribution of unused tariff factors where if the distribution of these factors changed, the collective premium should be adjusted accordingly.

REFERENCE

11.       International Risk Management Institute. Insurance Glossary. Tariff. Retrieved 19^th

March 2016, from: https://www.irmi.com/online/insurance-glossary/terms/t/tariff.aspx

22.       Paavo Pitkänen (1975). Tariff Theory. ASTIN Bulletin, 8, pp 204-228 doi:10.1017/

S0515036100009338  

Impact of Detariffication (Part 1)

Detariffication had been implemented in other market like China and India, and therefore, in the experienced of detariffication, the impact on financial realism of insurers caused by the unhealthy competition has become one of the main concerns. Nevertheless, the general insurance market of Malaysia is normally seen as being comparatively well placed compared to China and India, in working into detariffication. The intensity of price combats in Malaysia can be reduced to a certain extent by having a Risk Based Capital (RBC) Framework in position forward of detariffication. Furthermore, Malaysia has a standpoint to advantage from the experiences of other markets in the preparation of detariffication for the industry. In the case in China, tariffication is once again being reintroduced after detariffication is implemented for three years as it is needed to be re-imposed to govern the amount of losses grieved by the industry on deteriorating prices account, growing commissions and other expenses. As for Malaysia, it is more unlikely to involve in the same condition.

According to Subramnian (2011), detariffication eliminates the control of price in the market and result in an extreme reduction in premium rates being offered by the insurance companies in the soft-market. As the excessive of the capacity available, otherwise the low demand of insurance in the market, hence, it is unsustainable to have business for the insurance company at the prevailing rates, making an increasing in stressing the capital constraint of several insurance companies.

Now let us look further into the impact of detariffication on the premium level which is expected to be different across production lines. The general impact is impulsive in motor insurance, however, it is probable that the Motor-Act cover, and can be witness a significant increase in rate if detariffed. Along with the decrease in potential rate in Motor Non-Act cover, this can be cancelled especially for the private car and potentially motorcycle segment. In the long run, the cross-subsidization between Motor Non-Act cover and Motor Act cover will be reduced expectedly while in the current situation, it is relatively important as it is cover. As the commercial vehicles segment is underpriced, hence, it then expected to have a uplifting rate. (Sabhlok & Malattia, 2014)

Conferring to a latest survey conducted by Towers Watson, over 45% of the general insurance professionals polled predicted motor premium rates to decline while around 35% of them estimated rates to rise, at the same time as the rest sensed that motor premium level will persist approximately unaffected. The poll itself illustrates that there is a substantial amount of ambiguity and dissention in the impact of detariffication for Motor insurance.

Additionally, the impact of detariffication on average fire insurance premium level, average motor insurance premium level and commission level.

The impact of detariffication on average fire insurance premium level

The impact of detariffication on average motor insurance premium level

The impact of detariffication on commission level

For Fire Insurance, the overall rate will drop in the general consent, exclusively for the tariffed residential and commercial business lines which are considerably profitable. A gradual decline in the rates are expected over the time for residential cover as this is characteristically traded in conjunction with mortgages through a banc assurance channel, where generally competition may be limited due to tactical partnerships. For the tariffed commercial business, the estimated rate dropped is at a quicker bound. Although there are some elasticity in rate setting for self-rated and specifically rated risks, if insurers are permitted freedom to regulate their own prices without respect of tariff rates, the competition will be intensify.

As noted earlier, detariffication will ended in amplified competition amongst insurers, improved product diversity and developing consumer preferences. In such situation, the distributor role develops even more critical as they can help consumers to traverse through the countless of product selections, same goes with the act as the standard bearer of their respective principals in effectively promoting their products in a aggressively competitive market. The dissemination channel assortment for Malaysia has persisted comparatively firm over the last the five years. Agents, who included Motor Vehicle Franchisees, have accounted for about 60% of the total GWP. Conversely, the channel assortment is estimated to have some changes in the “provider agnostic” channels’ favor, like Brokers and Banks, who can spot themselves as performing in the concern of the customer while assisting them recognize the finest product from the numerous possibilities that are existing in the market.

Suppose that detariffication also contains freeing up commissions open to intermediaries, and then insurers may start offering greater commissions to attract and retain distributors, further straining the inclusive profitability of the insurers or value offered to the customers or both. The industry is the present view that commissions would either remain the same or surge post detariffication.

References

11.      Sabhlok, R. & Malattia, R. (2014, August). Detariffication in Malaysian General Insurance Sector – What to expect?
Retrieved February 29, 2016 from https://www.towerswatson.com/en-MY/Insights/IC-Types/Reprints/2014/08/Detariffication-in-Malaysian-General-Insurance-Sector

22.      Subramnian, V. (2011, December 8). IMPACT OF DE-TARIFFICATION ON PROFITABILITY OF NON-LIFE INSURERS. DE-TARIFF – IMPACT, p.9.
Retrieved March 2, 2016 from http://www.actuariesindia.org/GI/V.%20Subramanian.pdf

Detariffication of Motor Insurance

Motor detariffication means that the insurance companies in Malaysia are allowed to set their own motor insurance prices. If you are considered a safe driver, your car insurance will be massively cheaper. If you are considered a dangerous driver, your car insurance will be more expensive.

For Malaysians, regardless of residents of the urban city or the rural areas, commuting with one’s own motor vehicle has become an essential part of their daily lives. So it is unsurprising then that motor insurance forms the bulk of Malaysian general insurers’ gross premiums (about 44%) as shown in the pie chart below.

Pie chart: Total General Insurance Market Share 2015

There are mainly two coverages in the Malaysian motor insurance:

1)      Own Damage (OD) policies cover physical damage to own vehicle and is an optional coverage

2)      Third party (TP) policies cover bodily injury and collision and is mandated by law §

Comprehensive policies cover both OD and TP.

Industry players view the detariffication of motor insurance as a positive move. This is because risk-based pricing approach for motor insurance in the general insurance sector will allow low-risk consumers to enjoy competitive rates compared to the high-risk drivers.

According to Maybank Ageas Holding Bhd chief marketing officer, Harvey Chamberlain, low-risk customers will receive better pricing in motor insurance as the behaviour and characteristic of drivers will be taken into considerations in the pricing of policies. Other risk factors of motor insurance include gender, marital status, age, traffic violations, years of driving, licence type, occupation of owner, gender and claims history. For example,

                   Gender: Male drivers are more expensive than female drivers

                   Martial Status: Singles drive more dangerously

                   Occupation: Educated people drive more carefully

       Location: (Based on your home) KL driver are more likely to have an accident

Some of the major players in motor insurance are Allianz Malaysia Bhd, AMMB Holdings Bhd and MSIG Malaysia. RHB Research analyst-- Kong Ho Meng told StarBiz that the central bank, Bank Negara, had been gradually increasing motor premium rates since 2012, and that the increase of about 5% was marginal and almost similar to 2013’s revised motor tariff premiums. Therefore, he said, this would not translate into significant earnings increase for motor insurance players as costs will move up proportionately. This is because claims, which form a large proportion of costs to motor insurers, are uncertain and difficult to predict. The other components of costs are commission and management expenses. He also added that claims have gone up over the years and so motor insurance is a tough business and not a very profitable one.

According to Kong Hong Meng, the detariffication of the motor insurance premiums is still looking further into the details to being worked out and would incorporate premium bands to prevent the risk of under-pricing of premiums. Premium band is a type of controlled deviation on premium change for motor insurance products and the move to incorporate premium bands would reduce the severe margin erosion for general insurers, in which this case motor premium has a higher exposure to. One of the reasons Bank Negara was looking into the premium bands was to ensure that the general insurance industry would not suffer with full detariffication, which happened in India and China when motor premiums were totally abolished in the absence of a strong regulatory capital enforcement. Therefore, insurance players should not under-price a product if it bears a high loss ratio and places a heavy strain on its capital adequacy ratio (CAR).

Bar chart: Insurance Industry CAR trend from 2008 - 2012

According to the bar chart shown above, the insurance industry CAR has improved over the years 2008 to 2012 and also has improved to 254% in 2014 from 246% in 2013. According to Bank Negara, the surge in the general insurance CAR is partly due to refinements in the treatment of premium liabilities under the risk-based capital framework. However, Kong believes that the detariffication will be a partial and gradual one that could lead to a slight margin erosion.

Meanwhile, an analyst with an investment bank said he expected insurance companies to enjoy better margins and revenue growth after the full implementation of the detariffing of motor insurance premiums in the next two years. This is due to the fact that premium rates would be further differentiated in accordance with the risk profile of individual vehicles. This is a win-win situation for motor insurers and vehicle owners, as those with good claims experience would enjoy much better premium rates than those with a higher risk profile.

The General Insurance Association of Malaysia (Piam) has also stated in a statement that the new motor cover framework had a two-pronged strategy, that is to enhance efficiency in the provision of motor cover by the industry, and a gradual price adjustment that would ensure that the public was able to purchase motor insurance at affordable premiums.

The detariffication of motor insurance is expected to be implemented in phases starting from 2016. This is good for the general insurance market in the long term. Moreover, it also will be fair for the market as consumers will be paying for their risk. Therefore, it is only the matter of time for the industry players to be prepared for the liberalisation and to adapt on the changes, while waiting for the guideline from Bank Negara Malaysia on how the detariffication will take effect.

Reference

11)      Dhesi, D. (2014). Gradual Rise in Motor Insurance Premiums.

Retrived from

http://www.thestar.com.my/business/business-news/2014/02/10/gradual-rise-in-motor-insurance-premiums/

22)      Dhesi, D. (2015). De- tariffication of motor and fire insurance premium expected.

Retrived from

http://www.thestar.com.my/business/business-news/2015/04/13/finer-points-sought/

33)      Jayaraman, P. (2015). Risk Pricing for Motor Insurance A ‘Positive Move’.

Retrieved from

http://themalaysianreserve.com/new/story/risk-based-pricing-motor-insurance-%E2%80%98positive-move%E2%80%99

44)      Motor Detariffication in Malaysia. (2015).

Retrived from

http://www.ibanding.com/motor-detariffication-in-malaysia/