Irda whip on heavy discounts to corporates

Asks insurers to look into burning cost; group health premiums may go up

The Insurance Regulatory and Development Authority (Irda) has cracked down on general insurance companies offering heavy discounts in the group insurance portfolio to attract and retain corporate clients. The regulator, in its guidelines on pricing of risk, said industry-wise loss cost must be the starting point and should be considered for pricing a product.

With this, heavy discounts, especially in group health schemes, are expected to cease and premiums likely to increase.

It further said insurance companies can consider burning cost— an insurance-industry calculation of excess losses divided by total subject premium — of a particular risk on its own past acceptances for all available products. It further said since burning cost for property risks are published by Insurance Information Bureau of India (IIB) are for perils other than natural catastrophe, insurers need to consider adequate pricing for the said risks, if offered.

Applicable on fire, property and group health space in the initial phase, this will be enforced from January 1, 2015. Fire, property and group health segment have seen heavy discounts offered inspite of insured losses going up.

The insurer’s own experience on procurement and management costs also needs to be considered to a large extent of current levels, said Irda. The regulator said that due to aggressive competition in the market, risks are not being adequately priced.

"We will now see right pricing coming into the market. Several non-life insurers have been indulging in unhealthy pricing to keep corporate clients in their portfolio," said the chief executive of a mid-size private general insurance firm. He said due to the right pricing, premiums will go up and companies may ask employees to part-pay the premium amount.

Burning cost is the estimated cost of claims in the forthcoming insurance period, calculated from previous years’ experience adjusted for changes in the numbers insured, the nature of cover and rate of medical inflation. This is a ratio used by insurers to protect themselves from larger claims that exceed premiums paid.

If there is acceptance of burning cost lower than the above mentioned and the board approves it subject to Nat Cat covers or based on experience, the Board has to give an approval. Further, this has to filed as an exception report and Irda will formulate suitable standards for bringing it out on a regular basis.

Experts said that unhealthy competition is eroding the group health space with prices as low as 10-20 per cent lower than claims experience. The regulator is looking closely into this matter and will look at having higher capital requirements or solvency rates for those insurance companies who quote un-viable prices.

In a bid to retain corporate accounts, certain non-life sector insurers are indulging in this practice of offering high discounts. Industry players said that there is not just transfer of accounts from private to public, but also from one private non-life insurer to the other. Industry experts believe that it is not sensible to offer discounts to large profitable firms, since they are capable of purchasing insurance without a subsidy.

Health insurance, which has an almost 23 per cent market share in the general insurance space, has seen the incurred claims ratio touch 96.43 per cent in FY13, as compared to 94 per cent in FY12. While for public sector general insurers, the incurred claims are still less than 100 per cent, private sector general insurers have seen it cross 100 per cent. This means that the claims incurred are more than the premiums paid for such private general insurers.

Irda has said that they will monitor compliance to these norms closely and any deviation will be viewed seriously.