INSURANCE INSIGHT: Motor Insurance De-Tariffing- The next big thing to impact the general insurance industry
Motor insurance has been de-tariffed from January 2007 onwards. This will significantly impact the way motor insurance is sold and its premium rates. In the tariffed scenario, the rating factors taken into consideration are:
• Geographic zone – Where the vehicle is mostly plying and is registered. India is divided into two zones viz. A and B. In a de-tariffed scenario, this would change considerably as some more vital parameters would be brought into consideration while arriving at the premium. The challenges in a de-tariff market would be to meet the expectation of the various stakeholders like policyholder, insurer and the auto manufacturer. Customers expect that premiums be low, that they get the best quality of repair and value added services and other benefits. The auto manufacturers expect low overall vehicle cost to the customer, longer vehicle retention and dealer revenue. On the other hand the insurer's concern is quality of information available in the market to price the product, competitive pricing, superior risk selection and lower repair costs.
• Engine capacity – Where the cubic capacity of the engine is considered
• Insured Declared Value (IDV) – IDV of the vehicle that is based on cost and age of the vehicle
• Age of the vehicle
Stakeholders' Expectations:
There are some anomalies in the way the premiums are determined currently. To explain this, let's look at an analysis of the claims pattern and premium charged in Ludhiana and Goa. Both the cities are based in Zone B area and the premium is the same for both these areas. But the quantum and nature of risk is completely different. An analysis revealed that:
• The claim ratio is higher in Ludhiana apparently due to the congested traffic conditions.
• The repair cost is lower in Ludhiana than Goa. Presumably due to the presence of large number of local garages and competitiveness among them. Also the cheap availability of labor brings down the overall repair cost.
• Theft claims are higher in Ludhiana than in Goa. Businessperson uses his vehicle more than probably a software engineer as most of them can be assumed to have a pickup and drop facility provided by their employer.
Loading pattern – A businessperson may load more in his vehicle than a working professional.
Driving pattern – An uneducated person may drive more rashly than an educated one. So in a de tariffed scenario some of these anomalies would be removed, as there are some more parameters that would have to be considered to arrive at the optimum premium. The additional parameters would be:
Usage pattern – A better civic sense.
Vehicle make and model – Different make and model vehicles behave differently as far as risk is concerned even though the engine capacity of the vehicle is the same.
• Cost of vehicle and aggregate part cost ratio is also a major factor. In a small car ratio is lower and it is higher for high-end cars.
Vehicle with safety characteristics – Body design and passive safety characteristics i.e. protection to occupants and to third party pedestrians also.
• Vehicle active safety features like ABS, braking effectiveness and stability.
• Repair skill and infrastructure of manufacturer-authorized workshops is another important factor. Easy availability of spares and repair infrastructure at the dealer level is crucial.
• Dealers play a key role in providing insurance business and is the highest profitability driver. The issues with them would range from labor cost to commission.
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