Based on the feedback received
on the exposure draft guidelines on File & Use procedures, IRDA
requirements for consideration and review of products under File & Use
guidelines along with underlying logic are as under: (i) Design and rating of
products must always be on sound and prudent underwriting basis. The
contingencies insured under the product should be clear and provide transparent
cover which is of value to the insured. (ii) All literature relating to the
product should be in simple language and easily understandable to the public at
large. As far as possible, a similar sequence of presentation may be followed.
All technical terms should be clarified in simple language for the benefit of
the insured. (iii) The product should be a genuine insurance product of an
insurable risk with a real risk transfer. Alternate risk transfer or financial
guarantee business in any form will not be accepted. (iv) The insurance product
should comply with all the requirements of the Protection of Policyholders
Interests Regulations 2002. (v) Insurers should use as far as possible, similar
wordings for describing the same cover or the same requirement across all their
products. For example clauses on renewal of insurance, basis of insurance, due
diligence, cancellation, arbitration etc., should have similar wordings across
all products.
(vi) The pricing of
products should be based on appropriate data and with technical justification.
(vii) The terms and conditions of cover shall be fair between the insurer and
the insured. (viii) Margins built into rates shall be consistent with the
experience of the insurer in respect of commission, management expenses,
contingencies and profit. (ix) Insurer should take necessary steps in ensuring
that competition will not lead to unprincipled rate cutting and other improper
underwriting practices.
FINAL
TAKE OFF
Finally, the IRDA confirmed withdrawal of
tariffs effective from 1st January, 2007. It was reiterated that the tariff
general regulations, other than those relating to rating viz. terms,
conditions, clauses, warranties, policy wordings etc. shall continue to be
followed until further orders. In case of the mandatory motor TP, where the
insurers have been expressing difficulty to underwrite unless they are
permitted to charge the premium that they consider appropriate (which means
heavy premium in commensuration with high claim ratios of motor portfolios)
rates are prescribed by regulator. The Authority also issued Order directing
insurers that they shall not refuse cover for third party risks. The underlying
reason for existence of price regulation is consumer pressure to avoid
enhancement of premium and to ensure that insurers shall provide motor third
party liability insurance cover to all vehicles. Formation of Motor Third Party
Insurance Pool As per Section 34 of the Insurance Act, the IRDA directed that
all general insurers registered to carry on general insurance business
including motor insurance business or general reinsurance business shall
collectively participate in a pooling arrangement with the following provisions
to share in all motor third party business written by any of the registered
general insurers: 1. Participation in pooling arrangement: Every insurer
registered to carry on general insurance business (including motor insurance
business) or general reinsurance business shall automatically participate in
the pooling arrangement to the extent set out herein. 2. Underwriting insurers:
Every underwriting office of every insurer that is authorized to underwrite
motor insurance business for the insurer shall also be authorized to underwrite
motor third party insurance business that will be shared among all insurers
through the pooling arrangement.
3. Pooling mechanism: The
pooling of business among all insurers will be achieved through a multi-lateral
reinsurance arrangement between the underwriting insurer and all the other
registered insurers carrying on general insurance business s (including motor
insurance business) and general insurance reinsurers. 4. Participation in motor
third party insurance pooled business: The participation of General Insurance
Corporation of India (GIC) in the Pooled business shall be such percentage of
the motor business that is ceded to it by all insurers as statutory reinsurance
cessions under Section 101A of the Insurance Act. The business remaining after
such cession to GIC shall be shared among all the registered general insurers
writing motor insurance business in proportion to the gross direct general
insurance premium in all classes of general insurance underwritten by them in
that financial year. 5. Underwriting of business: Underwriting offices of
insurers shall follow the underwriting instructions of the General Insurance
Council in the matter of procedures for underwriting and documentation and
accounting and settlement of balances. The business shall be underwritten at
rates and terms and conditions of cover as notified by the Authority from time
to time. No vehicle owner shall be denied third party insurance cover in
respect of his vehicle which is holding a valid permit for use on public roads
except on grounds of attempted fraud.
6. Claims processing and
settlement: All claims in respect of third party death or injury or physical
damage shall be processed for settlement in a speedy and efficient manner in
accordance with the instructions of the General Insurance Council. For this
purpose, the Council shall adopt a pro-active claims settlement policy adopting
the most efficient claims processing practices possible. 7. Administration of
the Pooling arrangement: The GIC shall act as the administrator of the pooling
arrangement. It will act under the guidance of the General Insurance Council.
For this purpose, the Council may establish such Committees of insurers as are
necessary to operate the Pooling arrangement and process and settle claims in
the most efficient manner. 8. Remuneration: There will be no agency commission
or brokerage payable in respect of motor third party insurance business. The
underwriting insurer will be paid a reinsurance commission of 10% on the
premium ceded by it to all the other insurers and reinsurers. The GIC as
administrator shall be paid a fee of 2.5% of the total premium on motor third
party insurance business in respect of the business underwritten for the pooled
account. Each insurer shall bear the cost of hardware required to operate the
pooling arrangement within its offices. The GIC will bear the cost of hardware
necessary to administer the pooling arrangement in its offices. The cost of the
operating software for the pooling arrangement shall be shared by all the
insurers and reinsurers in the manner decided by the General Insurance Council.
Each insurer shall bear the cost of travel of its executives to attend to the
work relating to the pooling arrangement. However, any travel specifically to
service a claim shall be recoverable as claims related expenses.
9. Agreement: The insurers
and GIC shall enter into a multi-lateral reinsurance arrangement to give effect
to this pooling scheme. 10. Review: The Authority will review the operation of
the pooling arrangement and the need for regulation of the premium rates and
terms of cover and will issue such directions from time to time as may be
considered necessary Managing the Transition It may be noted carefully that
de-tariffing does not imply or mean that the companies can set the premium
whimsically. It facilitates setting competitive premium model where there is
neither excessive pricing nor non-viable premium undercutting which may create
instability. The companies are encouraged to promote better underwriting
decisions and the products filed have to be justified with supporting data
regarding the rates. If the companies were to undercut the premium to
uneconomical levels, then again they would be brought back by the losses that
they may face. Therefore, IRDA, since its inception firmly believed that
sustainable growth in the insurance industry is possible only in an environment
which values and promotes financial stability, increased management capability
and total public accountability. This necessitates in turn, good corporate
governance practices to be followed in the companies as well as with the
regulator. With this objective the Authority conducts off-site and on-site
supervision at periodic intervals in order to assess the soundness of the
insurance company.
TARIFF
ADVISORY COMMITTEE
The Tariff Advisory
Committee (TAC) is a statutory autonomous body in India under the Insurance
Act, 1938. It formulates and administers tariff for major classes of General
Insurance business such as Fire and Allied perils, Petrochemicals, Marine Hull,
Engineering and Motor etc. TAC also regulates terms and conditions that are
offered by the insurers. The TAC is a body of experts headed by the Chairman of
the (IRDA) GIC as an ex-officio Chairman, and representatives from insurance
companies, Ministry of Finance and Bureau of Industrial Costs and Prices
(BICP), Government of India. Further, technical groups consisting of
representatives of insurers as well as of the TAC have been constituted for
various classes of insurance. These groups assist the TAC in making changes in
ratings from time to time, in relation to loss experience. The TAC, while
evaluating and rating a risk takes into consideration, the past loss record and
physical features of the risk such as safe distances between blocks, provision
for Fire fighting appliances, and good house-keeping. Further, the TAC also
specifies special ratings and discounts to extend the benefits of lower
premiums to the insured. The TAC at regular intervals interacts with the
insured’s interest groups, Surveyors, Associations, Trade bodies, and other
forums. It also advises on upgrading safety standards, and makes publications
of Fire Protection Systems and Building regulations etc.
History of TAC in the pre
and post De-tariffed era Before understanding the role of TAC in the detariffed
regime, a brief peep into the past history of TAC will throw light on the
objectives behind the setting up of this committee, the reasons leading to the
government to detariff and the role assumed by this committee at present in the
detariffed regime. Basically, Insurance in India started without any
regulations in the nineteenth century of British colonial era. However, after
the independence, the Life Insurance business was nationalized in 1956, and the
general insurance business was nationalized in 1972, with 4 insurance companies
operating under the supervision of General Insurance Corporation of India (as
discussed in the earlier part of this chapter). It was expected that the
subsidiary companies would provide effective competition to each other. As
seen, these companies acquired considerable experience, expertise and financial
strength over the decades and also established reasonable standards of conduct
of BUSINESS.
Role of TAC in the present
de-tariffed era With the abolition of tariffs, the role of Tariff Advisory
Committee has undergone a change. TAC is now entrusted with the following
functions in the changed scenario: - Collection of data on premiums and claims,
analysis of such data and dissemination of the results to the insurers - Report
to IRDA on the underwriting health of the market and any aberrations in market
behaviour - Constitution of Expert Groups at the request of the General
Insurance Council, to look into underwriting issues and recommend necessary
action - Organize training to underwriters at the market level and - Attend to
public grievances on non-availability of insurance and try to resolve the
issues by discussion with insurers. Therefore, finally Detariffing refers to
the withdrawals of rates in specified class of insurance by the Regulator. In
other words, it means all the insurers have the freedom to price based on their
experience and judgment. It improves the variety and make competitive the price
of insurance products. The Committee also recommended that the area under
tariffs should be progressively reduced with the object of limiting it to only
few classes to promote competition and improve underwriting skills.
LOSS
PREVENTION ASSOCIATION OF INDIA (LPA)
It was due to the
increasing incidence of fire accidents, road mishaps, industrial accidents,
damage to cargo resulting in loss to cargo and life that the GIC has initiated
steps in setting up of the LPA to prevent such losses and minimize their
consequences. The Loss Prevention Association of India Ltd is engaged in
promoting safety and loss control through education, training and consultancy
in India and abroad. The LPA is a company limited by guarantee established in
January 1978. It is sponsored by the GIC of India and its four subsidiaries.
GIC and its subsidiaries provide the entire finances for all its activities.
Membership subscription and fees for services are also source of finance for
LPA. LPA’s work involves both educational and engineering aspects of safety. To
meet these requirements, the Association employs a team of professionals with
expertise in various technological aspects of loss prevention. While, the
insurance companies constitute ordinary members, some of the organizations such
as Central Building Research Institute, Central Road Research Institute, Indian
Institute of Packaging, and Indian Standards Institute, are honorary members of
LPA.
The main objectives of the
LPA are as follows: To create awareness and appreciation of the need for loss
prevention and loss reduction. To provide advice and expertise on techniques of
loss prevention To educate public and workers in techniques of loss prevention.
To support research efforts in various fields of loss prevention. To organize
and supervise facilities at marine terminals for cargo loss minimization. To
organize fire salvage operations. The activities of the LPA are very wide and
comprehensive ranging from conducting mass communication campaigns to draw the
attention of the public for the need and methods of loss prevention. Some of
the important activities broadly include: * Development of training programmes
on fire safety, material handling, road safety and a host of other related
subjects. These programmes are aimed at supervisory and managerial personnel. *
Providing safety and risk analysis services, including identifying and
evaluating exposures to property damage, and other accident hazards affecting
an organisation.
Offering risk management
service aimed at identifying risks to which manufacturing and business houses
are exposed, suggesting appropriate risk control and transfer strategies. This
also includes analysis of total insurance portfolio from coverage and adequacy
point of view. In providing these services, the LPA works hand-in-hand with
other professional organizations like the Bombay Fire Brigade and Salvage
Corps, in their efforts to reduce and prevent fire accidents in industrial
sector as well as at homes. Undertaking fire protection system inspection and certification
as per Tariff Advisory Committee (TAC) norms. Publication of manuals,
handbooks, guidelines, periodical newsletter for disseminating information on
safety through its quarterly journals-Loss Prevention News and Road Safety
Digest. LPA also provides advice on safety through posters, bulletins,
leaflets, data sheets etc.
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