November 14, 2014
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.