Thursday, Dec 25, 2003
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By K. T. Jagannathan
CHENNAI, DEC. 24. A three-member committee, set up by the Insurance Regulatory and Development Authority (IRDA), has recommended April 1, 2006 as the deadline for introduction of a non-tariff system in the general insurance market.
Stressing the importance of a free market sans tariff and price controls, the panel felt that all parties concerned should take up this issue on a priority basis. While advocating a movement towards free market, the committee wanted `de-tariffing' of the entire general insurance market both profitable ones such as fire and engineering and unprofitable field like motor.
The committee wanted a `road map' for meeting this deadline.
If a `pure risk regime' as desired by it were to be in place by April 1, 2006, the individual insurers had to be encouraged to build up statistical base for their own risk acceptances on businesses now under tariff, category-wise. This would prepare them for a `pure risk regime' where rates would not include any administration and/or procurement cost or profit margin. In its reckoning, the market "should have floating rates in which the underwriting skills, cost and profit consideration will have primacy from April 1, 2006.''
Admitting that the introduction of `pure risk' rate regime could upset the market applecart in the immediate term, the committee suggested a way out. It felt pure risk rates could be considered the minimum benchmark, subject to discipline and inspection in the interim. It felt that the Tariff Advisory Committee could be asked to prepare and monitor the benchmark pure risk rates in the initial period following introduction of `de-tariff regime.'
The industry tariff structure had no incentives for an insurer to build up their individual risk category acceptances and experiences to be able to price risks on claims cost plus basis, the panel pointed out. "It is time individual insurers started building up their statistical data on sound lines to avoid a chaotic situation and price wars later,'' the committee said.
The committee recommended the continuation of 5 per cent special discount for corporate bodies, both in private and public sectors, on fire and engineering insurances till de-tariffing of rates by April 1, 2006 or earlier. It saw no reason to withdraw it at the moment. The panel also recommended that the paid-up capital norm for qualification for special discounts be raised from the existing Rs. 10 lakhs to Rs. 1 crore for corporate bodies. It also wanted the special discounts for corporate bodies restricted only to fire and engineering insurances. Where special discount was not applicable, the agency commission for insurances of individuals and corporate bodies with a paid-up capital below Rs. 1 crore should be restricted to a maximum of 10 per cent for the agents. The brokerage should be a maximum of 12.5 per cent on tariff covers, it said. The committee also suggested varied possibilities of special discount eligibility for corporates, depending on their capital base. These packages, the panel said, should be viewed as only interim, pending de-tarrification of the market by April 1, 2006.
The committee wanted the licensing norms for direct broker reviewed. It expected brokers to get the IRDA nod before opening new offices. The panel was against sub-broking as it could trigger unintended legal tangles.
The three-member panel was headed by A. C. Mukherjee. It comprised K. N. Bhandari and G. V. Rao.
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