IMPACT OF DETARIFFICATION
1. Detariffication is expected to bring in pricing efficiency, leading to improved prices for good risk and higher prices for substandard risk and will be the end of cross subsidy.
2. Rating is expected to reflect the company’s book of business, be in step with financial objectives, and consistent with solvency conditions. It presupposes pricing flexibility to the Insurance companies. Pricing would become a factor for competition in addition to marketing and service.
3. But the companies would become selective in their customer base there by skimming of the cream. Availability of insurance would become scarce for customers with bad history and substandard risks. There is the possibility of unhealthy competition amongst the insurance companies to increase revenue and customer base.
ISSUES TO OVERCOME
1. Rate making depends on the availability of data on loss costs, profit and contingency expenses, expense provision, investment income offset, and other charges.
2. The rates developed should be adequate, not exorbitant and should balance the interest of policy holders and insurance companies.
3. The assumptions on loss cost, expense provision, investment return, to claims handling procedures, payment patterns, reserving practices, and operations which have been factored in while developing existing tariff becomes less relevant. The assumptions with respect to economic, legal, social, and political environment are no more valid and keeps changing dynamically.
4. The open market scenario would lead to introduction of new products which would include drafting and modifying of new policy documents, clauses, conditions, and warranties. This would result in multiple policy wordings and formats.
5. The data is currently available at the aggregate level for perusal. With the advent of private insurers with limited geographic focus, and selective client base, the aggregate level data is not appropriate for rating purpose.
SUGGESTIONS
1. Regulators could provide basic guidelines for rate making. Rate making procedures are often complex. The complexity begins with basic elements, such as earned premium to be used, exposure base, relativities such as territory, class, and industry group, years of experience, losses, and expenses to be factored and weights to be allocated for each factor.
2. Minor variation is each of these factors will lead to divergent results. It is suggested that minimum guidance on accepted elements and the treatment be specified upfront. Treatment of optional elements can be decided on case to case to basis.
2. Minor variation is each of these factors will lead to divergent results. It is suggested that minimum guidance on accepted elements and the treatment be specified upfront. Treatment of optional elements can be decided on case to case to basis.
3.Pure premium (the fraction of the premium payment that is used pay the probable losses.) methods can be used if loss data by exposures is available.
4. A statistical agency at the national level to collate data and a structured framework for data collection is needed.
5. Collection of data at the granular level of risk, risk classes, industry groups, territory wise, over a period of time is necessary to understand the loss development patterns. The balance between historic and current data, the assumptions currently being carried on, the volume and correctness of data have importance in rating a risk.
6. Understanding and predicting developing trends in the marketplace, technology, economy, financial market, legal and political economy has influence on the rate. This is a continuous activity, which will lead to changes to the existing rates of introduction of new products of modification to existing products. Insurance research would now require a specialized function on its own.
