At the time, the chief of New India Assurance, India´s largest non-life insurer, even said there was no need to liberalize the tariff regime as “it would lead to chaos and the industry would not stabilize”.[break]
But beginning Jan 2007 till Jan 2009, when Indian non-life insurance companies were gradually allowed to set the rates, nothing that had been feared by insurers or those in the regulatory body came to pass. Instead, premium prices, which came down by as much as 40 percent for car insurance and 60 percent for fire insurance, brought relief to customers, who were earlier paying high premiums.
In addition, customers also got a wider choice as the insurance companies had to focus on innovation to survive and offered customized products as per customer needs.
In Nepal, many at the Insurance Board, the insurance sector regulator, and those at the helm at non-life insurance companies seem to be harboring the same sentiments as Indian insurers back in 2003. As a result, non-life insurance companies still do not have the freedom to fix insurance policy rates on products such as fire, marine and motor insurance.
Currently, a government body, the Tariff Advisory Committee, which is formed under the chair of the Insurance Board, sets the floor tariff rates on fire, motor and marine insurance policies sold by all insurers.
As per this pricing regime, insurance companies can raise policy rates if they think they are going to incur losses, but they cannot reduce the rates even if they deem that they´d be ripping off customers if they charge the prices set by the government. And the ´beauty´ of this regime is that those who try to reduce the rates can be fined by the regulator.
The Insurance Board says these restrictions were created so that companies do not engage in price wars to the extent of completely emptying their reserves and going bankrupt. It fears that clients may be denied payment if a company goes insolvent.
“All we are trying to do is create a well-functioning market that protects consumer interests and allows companies to generate enough revenue,” an Insurance Board official told Republica on condition of anonymity.
But in the process, the government may be denying policyholders access to low-priced policies.
Most of the chiefs of non-life insurance companies that Republica talked to said policy prices will come down once the market enters into a detariffed mode.
Balance sheets of insurance companies also indicate that the companies can afford to reduce policy rates if the market is detariffed, as many of them have been posting high profits.
In the last fiscal year, 17 non-life insurance companies earned a net profit of Rs 565.9 million. On average, each company, established with a capital of Rs 100 million, earned a net profit of 33.28 million. So, once the market is detariffed, it is highly likely they will feel the competition and opt to squeeze profit margins by selling products at cheaper rates.
This would be very good news for customers. But the insurance companies do not want this to happen.
“Our market has not matured yet so it will be wise to wait for a while before allowing the companies to fix tariffs on their own,” Bhoj Raj Sharma, CEO of Neco Insurance, told Republica.
His comments do not seem to make a lot of sense as Nepal´s insurance market was liberalized two decades ago following promulgation of the Insurance Act 1992. In contrast, India opened the gates to the private sector only in 1999. Yet the Indian companies seem to have matured enough to adapt to severe policy changes while Nepali companies are considered “toddlers” still.
Khem Prasad Baral, advisor to Nepal Insurance Company, is against a detariffed market and said Nepali insurance companies are “only just learning to walk” even after 20 years of market liberalization. The government had created a comfort zone for them, which they refused to leave for fear of incurring losses.
The comfort zone refers to the tariff regime created by the Tariff Advisory Committee that allows companies to sell insurance products at similar rates. Because of this regime, companies here do not have to take into account factors like past loss experience, management cost, taxes and investor returns while fixing their tariff rates.
It´s time the Insurance Board realized that this practice of spoon-feeding is, on one hand, stifling competition in the market while preventing domestic insurance companies from enhancing efficiency, building capacity and prioritizing innovation on the other.
The companies know that once the regulator liberalizes the tariff regime, they will have to rate risks scientifically. They also know that in a detariffed market, companies can only generate profit if they are prudent in their underwriting -- fixing policy rates by calculating the risks.
“Sadly, our companies have not developed such capacity as most of the underwriters here do a shoddy job, while other human resources in the insurance industry have not received proper training,” Baral said.
In this environment, if companies enter into cut-throat competition and reduce policy prices without evaluating risks, many companies will eventually go bankrupt, Sharma said. “This will destabilize the market and even create chaos,” he added.
A surveyor, on condition of anonymity, told Republica that some companies, especially in the case of fire insurance for the industrial sector, have started sending surveyors to estimate risk before selling policies. But again this is done superficially. The surveyor just roams around the site and returns with virtually no information.
“To do a comprehensive survey you need to invest more than Rs 100,000 per policy, which the insurance companies say is not affordable,” the surveyor said.
According Baral, it´s a pity Nepal does not even have enough data on the motor insurance portfolio as no one seems to be interested in cooperating with traffic police over data on the quantum of accidents, i.e. the loss incurred in each accident.
“If we have at least one year´s data on this, the insurance companies would have a rough idea of the total cost of risk for which they have to provide coverage,” he said. "This may actually be a stepping stone toward liberalizing the tariff regime."
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