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The Insurance Regulatory and Development Authority (IRDA) is cracking down on general insurance companies offering heavy discounts in group insurance business so as to attract and retain corporate clients. The move signals that premiums would be rising.

IRDA, in its guidelines on risk pricing, said that industry-wise, losses should be considered in pricing a product. The regulator said that due to aggressive competition in the market, risks are not being adequately priced. Fire, property and group health segments have seen heavy discounts offered in spite of rising insured losses.

IRDA will be enforcing the pricing regime from 1 January 2015, reported the Business Standard. The insurer’s own experience with procurement and management costs also needs to be considered in the pricing, said IRDA.

“We will now see the right pricing in 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 that premiums will rise and employers may ask their employees to contribute to part of the premiums for group insurance.

IRDA also said that insurers may consider burning cost in their premium calculations. 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 the 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 that is lower than the computed figure,  the insurance company’s board has to give its approval. Further, this has to be filed as an exception report.

The regulator said that it will monitor compliance to its rules closely and any deviation will be viewed seriously.

Experts said that unhealthy competition is eroding the group health space with prices being 10-20% lower than the loss rates seen in the claims experience. The regulator is looking closely into this matter and will consider having higher capital requirements or solvency rates for those insurance companies which quote un-viable prices.

Long-term motor insurance for commercial vehicles is still some time away because non-life insurers are unprepared to bear the same premium costs for a duration longer than a year.

While long-term motor policies are being envisaged for the segment, general insurers are wary of these products especially in the commercial vehicle category because pricing cannot be revised while a policy is still in force, reported the Business Standard.

In addition, this category of business is a loss-making one. It is estimated that the combined ratio for motor insurance might hit 200% by 31 March 2015 on the back of higher claims especially from commercial vehicles.

“It is not viable to launch three-year policies for commercial vehicles because of the claims experience that the industry has had in this segment. Our motor book will suffer if we do so,” said the head of underwriting at a mid-size general insurer.

According to general insurance company executives, even though overall motor cover prices have risen this year, the increase is insufficient to compensate for underwriting losses and the higher combined ratio.

The Insurance Regulatory and Development Authority recently decided to limit the third-party premium hikes in motor insurance to 9-20%, compared to a proposal from the industry for hikes in the range of 20-137%.

IRDA has also introduced long-term motor third party insurance policy for two wheelers with a three-year term.

The insurance regulator has warned insurance companies that they would be penalised if they accept group health covers at a loss because such losses would ultimately be subsidised by individual health insurance buyers.

The Insurance Regulatory and Development Authority (IRDA) has also called insurance companies to come up with savings linked health insurance plan so that individual buyers do not see a spike in rates as they age, reported the Times of India.

Group health insurance is expected to become more expensive for companies where hospitalisation claims from employees exceed the premium paid.

At present, large companies with loss-making group health covers continue to escape rate hikes by shopping for new insurers. The chase among health insurers to build up top-line growth has resulted in their willingness to accept business even if there is little likelihood of generating a profit. According to IRDA, insurance companies cite these high losses to raise rates on individual policies where the buyer does not have bargaining power.

“We have seen cases where insurers are quoting rates below their burning cost. Since insurance business is nothing but pooling of resources, it is clear that if group premiums are inadequate, they are being subsidised by someone else,” said IRDA chairman T S Vijayan said in his address at a health insurance summit organised by the National Insurance Academy in Mumbai. Burning cost is a measure used to calculate the premium required to cover claim payments.

“We are going to increase solvency margins for companies that accept group health insurance at rates below their burning costs,” said Mr Vijayan. “If the group health premium is below the burning costs, we want you to inform your board about this. This will bring discipline into the underwriting process,” he added.

Speaking of the need for affordable cover for older customers, Mr Vijayan said: “It is essential that there is some kind of a savings-linked health insurance plan. Rather than the premiums going up by leaps and bounds with age, a portion of the premium could go towards savings to be used in old age.”

The Select Committee of the Rajya Sabha, the upper house of the Parliament of India, which is vetting proposed amendments to the insurance law, is considering a proposal for the merger of the country’s four government-owned general insurance companies which would enable them to consolidate their market share.

Several representations have already reached the Committee and the Finance Ministry for the merger of the insurers, reported the Financial Express.

Employee unions of the four insurers – New India Assurance, National Insurance, United India Insurance and Oriental Insurance – had met Finance Minister Arun Jaitley and proposed a merger to form a single general insurance giant. The four have a combined asset base of over INR1 trillion (US$16.4 billion).

With the opening of the market and entry of private-sector companies in the non-life insurance sector and the ensuing real competition, continuing with the four public-sector insurers “appears meaningless”, said Mr KK Srinivasan, a former member of the Insurance Regulatory and Development Authority.

He noted that the government-run insurers have been losing market share, with their private-sector competitors commanding over 40% of the market. There is cut-throat competition for business. Currently, the general insurance market is served by more than 20 private players.

“The cost saving in merging the brick-and-mortar offices will be huge. Virtually every state capital has an administrative office, for each of the four insurers. Merger will bring down the administrative costs tremendously. Robust computerisation also will help,” Mr Srinivasan said. He pointed to the example of the Life Insurance Corporation of India, the country’s only state-owned life insurer which is the most dominant player in the life sector.”

A draft Bill to amend the motor vehicle law has attracted wide attention because of its proposals for big increases in penalties on vehicle owners who fail to buy insurance and traffic offences such as drunken driving and an accident in which a child is killed.

The Road Transport & Safety Bill proposes that if a motorcyclist is caught riding without an insurance policy, the penalty will be INR10,000 (US$163) while owners of light motor vehicles and auto rickshaws will have to cough up INR25,000. For any car or truck driver caught driving without an insurance policy, the penalty is as high as INR75,000. This compares to a fine of just INR1,000 for all vehicles under the law currently in place which is the Motors Vehicles Act, 1988.

“This (the enhanced penalties) will increase penetration of motor insurance,” Mr Vijay Kumar head of motor insurance at Bajaj Allianz General Insurance told the Hindu Business Line.

Although, at present, vehicle insurance is mandatory, many people violate the regulation.

A study by state-run general insurer  New India Assurance shows that nearly 70% of motorcycles and scooters on the road are not insured. About a third of the cars and trucks are uninsured as well.

“Today projects involve a global supply chain, where materials and equipment are sourced all over the world, and this inherently increases the risk,” he said. “When the complexity of multiple jurisdictions is introduced, different legal exposure, contractual obligations, tax and compliance issues, and cultural norms such as work safety have to be taken into consideration.”

Insurance industry executives say that penalties should go beyond fines and include loss of licence for repeated violations. Mr Sanjay Datta, head of motor insurance at ICICI Lombard, said: “If the rules say that a three-time motorcyclist offender will lose his licence, it will bring discipline.”

Meanwhile, the Insurance Regulatory and Development Authority (IRDA) has shelved its plans for liberalising third-party motor insurance tariffs, reported the Economic Times. This is due to opposition from public-sector general insurers who fear they may be forced to take on most of the burden if  private insurers charge exorbitant premiums for high-risk vehicles.

Third-party insurance, which is mandatory for every vehicle in India, is highly unprofitable as the liability for insurers is unlimited and the premium is fixed by the insurance regulator. At present, due to the high claims ratio of around 140% from third-party motor insurance, insurance companies provide cover from a common declined pool instead of from their own books.

India’s Supreme Court has ordered the country’s four state-owned general insurers to pay out at least 50% of claims arising from the devastating Jammu and Kashmir (J&K) floods without any verification.

These payouts will cost the insurers around INR40 billion (US$653 million), reported the Times of India.

The Supreme Court’s decision, handed down last week, was an endorsement of the J&K High Court’s 30 September order to the insurance companies to provide interim relief of 95% of the claim amounts of those who had taken insurance cover for INR2.5 million or less and 50% for those claims by persons who had taken cover of more than INR2.5 million.

Attorney General Mukul Rohatgi had pleaded with the Supreme Court on behalf of the insurance companies that the High Court order was open to abuse by unscrupulous elements and that the insurers should be permitted to at least conduct a preliminary survey of the damage before settling claims.

He said that the companies did not oppose the payments but were only seeking time till 30 November so that they could conduct assessments. He said if an actual estimate of the damage to insured properties and vehicles was taken, it would not exceed INR10 billion, but the High Court order would cast a burden of INR40 billion on the insurers which are United India, National, Oriental India and New India Insurance.

The Supreme Court bench said instead: “You just have 99 surveyors in the field and those small shopkeepers whose goods were under water for days, what will they be left with? They must get immediate relief as they have suffered heavily.”

The Supreme Court said that the hardship suffered by the people affected by the heavy floods, which hit the region last month, warranted a departure from ordinary procedure.”

Taking into account the Attorney General’s apprehension that the court decision could be abused by unscrupulous elements, the bench said: “If there is a little misuse in such a situation, let it be.

The government-owned insurance companies said that as of 9 October, they had received 9,917 claims involving an estimated amount of INR9.8 billion and that they had already issued 983 cheques for a total of INR251 million.

The Supreme Court decision could make the insurance companies susceptible to similar claims in other flood-affected areas, where affected persons would cite the court order refusing insurance to conduct preliminary damage surveys before settling claims.

Singapore has become Asia’s insurance hub for insuring construction risk , with companies based in the city-state projected to underwrite US$4.5 billion worth of construction projects this year, a 22% increase over the past five years. The figure is set to increase to US$6.5 billion by 2018, participants at a conference last week hosted by AIG were told.

New research by AIG found that for the first time, construction in emerging markets is outpacing that in developed markets.

Mr Daniel Abramson, AIG’s global head of construction, said that this shift is being driven by Asia’s population growth and increasing urbanisation.

“Last year, 52% of the world’s construction was in emerging markets. By 2025, we expect this figure to grow to more than 60%, with big infrastructure projects in China and India set to lead the way,” he said. The insurance sector in Singapore would play a key role in promoting this growth.

Mr Rudi Spaan, AIG’s head of broker and client management, said that what is being seen in Singapore not only indicated the increasing number of projects being undertaken across Asia, but also the multiple risks involved in these projects.

“Today projects involve a global supply chain, where materials and equipment are sourced all over the world, and this inherently increases the risk,” he said. “When the complexity of multiple jurisdictions is introduced, different legal exposure, contractual obligations, tax and compliance issues, and cultural norms such as work safety have to be taken into consideration.”

Companies therefore need to look for tailored solutions to ensure they implement risk management strategies that are tailored specifically to their project because in today’s environment there is no one-size-fits-all strategy, he said.

India is likely to face more floods in future, the New Delhi-based Centre for Science and Environment (CSE) has warned in a report issued in the wake of the worst floods to hit Jammu and Kashmir (J&K) in the northern part of the country in more than 60 years.

“India will be hit more and more by extreme rainfall events,” said the CES whose  researchers have found that heavy (>100mm/day) and very heavy (>150mm/day) rainfall events in India have increased over the past 50-60 years, according to local media reports. India will get more rainfall but in a much shorter duration, say the results, also predicting extreme precipitation during monsoons.

The study stressed that such extreme weather conditions are being induced by climate change. “The Kashmir floods are a grim reminder that climate change is now hitting India harder. In the last 10 years, several extreme rainfall events have rocked the country, this being the latest calamity in the series,” said Mr Chandra Bhushan, CSE Deputy Director General and the head of its climate change team.

Anticipating more such calamities in India, CSE Director General Ms Sunita Narain called for a policy change based on the predictions made by climate models. “The Indian government must discard its ostrich-like policy and get out of its denial mode. We will have to see the linkages between climate change and events such as those unfolding in J&K,” she said.

Separately, Dr RK Pachauri, director general of The Energy and Resources Institute (TERI), also warned that more such floods will occur in the country due to erratic weather patterns. Coastal floods and storm surges are also expected to increase in the future.

Meanwhile, insurance companies are expected to be hit with a loss of INR8 billion (US$131.3 million) to INR9 billion from the J&K floods which have displaced hundreds of thousands of people. Claims are expected on motor, household and shopkeeper policies.

Apart from direct cover by owners, a New India Assurance executive said that financial institutions, agencies and banks had taken insurance against loans given to individuals for houses, motor vehicles and shops.

The Insurance Regulatory and Development Authority (IRDA) has asked insurance companies to settle claims quickly. The regulator has increased the limit of losses required to be surveyed for settlement of claims in flood-hit J&K to INR50,000 from INR20,000. It said that the special dispensation is given to ensure expeditious settlement of claims and to mitigate hardship faced by policyholders in the affected region.

India’s insurance regulator, the Insurance Regulatory and Development Authority (IRDA), is set to scrap the decade-old standardised general insurance policy format covering fire, accidents or floods, leaving customers free to pick the kind of risk they need protection against.

The move could lead to reduced premiums for companies that want fewer events covered, reported the Economic Times.

For example, a power plant located in a desert state could seek cover against fire and explosion, but exclude flood. Meanwhile, factories near a river or located in low-lying areas could seek only flood cover.

“This will change the way companies buy insurance, and insurance companies price products,” an industry source familiar with the development told the newspaper. “This is the evolution from risk-based pricing to risk-based coverage. Smaller companies can avail themselves of customised products as per their needs.”

The move will bring certainty and transparency for insurance clients. Products could be customised to suit the needs of clients and supported by reinsurance, experts said.

Previous reforms in the insurance sector have been piecemeal. The first phase of liberalisation took place in 2007 when premiums were de-tariffed, with insurance companies allowed to set their own rates. In 2009, while freezing the basic wording, IRDA allowed companies to write add-ons. The latest proposal, when implemented, will constitute the long-awaited third phase of liberalisation for insurers.

The government has a Telecom Regulatory Authority of India (TRAI) to regulate prices of telephony, an electricity regulator to control power prices and so on. But India has no body to ensure that medical device companies do not overcharge patients. The result is loot.

Most patients are forced to pay anything between Rs 60,000 and Rs 1 lakh or more for cardiac drug eluting stents (DES) though the same stents cost Rs 28,000-Rs 48,000 even in rich European countries and the UK, where there is price control or a fair pricing mechanism for medical devices.

As senior doctors pointed out, almost all the over-priced stents are imported and hence the government has the bill of entry giving the price at which the stent is being imported, typically a third of the price charged to patients or even less. Yet, the government has done nothing to stop companies and hospitals from looting patients.

The Food and Drug Administration (FDA) of Maharashtra had done a detailed investigation into the overcharging of various medical devices including stents and had submitted the report to the National Pharmaceutical Pricing Authority (NPPA) over a year back, recommending that medical devices including drug eluting stents be brought under price control. The FDA’s report included pricing details of other devices too such as cochlear implant, bone cement and orthopaedic implants and pointed out that the price of most devices was hiked by over 100% at least.

The Maharashtra FDA report cites the example of drug eluting stents manufactured by Abbotts Vascular Devices Holland BV, a Holland-based firm. These stents were imported into India by Abbotts Healthcare Pvt Ltd at Rs 40,710 and sold to the distributor Sinocare at Rs 73,440 against a marked MRP of Rs 1.5 lakh. The distributor then sold it at Rs 1.1 lakh to Hinduja hospital, which in turn charged the patient Rs 1.2 lakh, a near three-fold jump over the import price.

Medical devices including drug eluting stents, orthopedic implants, disposable syringes, ocular lens and heart valves are notified as drugs under the Drugs and Cosmetics Act, 1940 but not included under the Drug Price Control Order (DPCO). Hence, their prices are neither monitored nor controlled. The multinational companies that dominate the market import the devices and mark MRP at whatever level they think the market can bear in the absence of any regulation. These devices even get customs duty concessions, the duty on cardiac stents being zero.

The NPPA has neither replied to the Maharashtra FDA after the report sent over a year ago nor has taken any action on pricing. When contacted, NPPA chairperson Injeti Srinivas told TOI that he was not aware of the FDA report as he had joined recently (in June this year) and that he would look into it.

“If the government was serious about doing something, it would have brought in price control as is done in even rich Western countries. The government knows this is happening because they can see the huge difference in cost between the import price and the price at which these devices are being sold to patients even in government hospitals. They just choose to close their eyes to this,” lamented a senior doctor in a government hospital.