Detariffication of Insurance Sector – Opportunities & Challenges for Auto Retail

Antony Jacob, Managing Director, Royal Sundaram Alliance Insurance Co.

Opening New Vistas - Detariffication

Come January 2007, the first phase of detariffication is set to kick in 'detariffed motor insurance regime' wherein the premiums will move from tariff based to risk based. Tariff free Insurance regime is expected to open up new opportunities and to present new challenges for both Insurer and Automobile Dealer. Quite a few interesting changes are going to take place in the market post detariffication.

Two major developments that de-tariffication is set to bring about are:

1.	Transition from administered pricing to risk based pricing: meaning that the premium rating will be based on features of the vehicle and the person driving it. And we anticipate increased participation from customers in rating a risk. As is the case in developed markets, the information provided by the customer will become crucial in deciding the pricing. In the case of motor insurance, a combination of a host of factors including the make, model, location, driver's age & experience, security features of the car and usage will all have an impact on the final premium that the customer will shell out.
2.	'Product Differentiation': which will probably represent the second phase of the de-tariff process. Insurers will be able to provide products packaged to meet a customer's unique requirements, and price them according to customer profile and product features.

 
Basis of Premium Rating

The present method of calculation of motor insurance is based on sum insured and other rating parameters like engine capacity, age of vehicle and geographical location. But, in the tariff free market, the customer will be paying the premium based on his/her risk profile. The premium rating from being based on the vehicle will now shift to being based on the driver. Thus, insurance will move from insuring a car to insuring the customer. To put it simple, a customer with a higher risk profile will pay a higher premium than a customer having a lower risk profile. In other words, customers who are prone to accidents would have to pay more and safe drivers will pay lower premiums.

The opening up of the market will not only impact the insurance companies but also the Auto Dealer fraternity, directly or indirectly. Since insurance will be moving from insuring a car to insuring the customer, for providing better products and services, there will be the need to augment knowledge about customers. Only then will one be in a position to offer a valuable proposition to our customers.

Therefore, it is very important for the dealer to ensure that proposal forms are properly documented and that the customer provides all relevant information. In the tariff free regime, premiums will also be based on various other factors like driving habits, as well as driver/owner details like the age of driver, past claims experience, occupation, usage of the vehicle, the vehicle parking areas, safety features of the car, etc. All these details are necessary, since any improper disclosure would compromise the claim and also impact the premiums charged.

What's more, if the repair or replacement cost is high, the premium will also be high. Premium for theft prone vehicles may be higher too. If the claims experience keeps moving up, insurance premium at the time of renewal will go up. However, if the Manufacturers, Dealers and Insurers come together, the problem can be identified and better remedial measures taken up immediately, which can result in superior customer service. Claims happen due to various reasons, but most are linked to driving abilities. It is important to understand that reduced accidents mean reduced outgo for repairs and insurance.

Giving Benefit to the Customers

The moot point is that most customers are likely to benefit in the tariff free market. The premium is likely to drop for some segments, while it may increase in other segments or covers. Customers will definitely get low rates if they follow a few preventive measures to mitigate the risks involved. Safe driving is one of the best ways to keep the motor insurance premium low. It will be imperative to park vehicles in a secured parking lot and to install vehicle safety equipments like anti-theft alarms, smart chips that de-mobilise the engine, anti-lock braking systems, seat belts, etc. to lower the insurance premium.

Today, Auto Dealers provide a one-stop shop facility to their customers, offering easy access to a variety of services like Finance, insurance, Repair & Servicing, Accessories, Spare Parts, etc, which helps in earning additional revenues. Apart from the above, dealers can also join hands with Insurance companies to provide additional services like Roadside Assistance for towing, Courtesy Car Breakdown Assistance, providing an ambulance for shifting the injured to the hospital and the like. All these "value- additions" can very easily be bundled into the insurance policy for the customer and yield additional revenue to the dealers. Furthermore, dealers may offer Annual Maintenance Contract (AMC) facilities to their customers with one of the likelihood being - it may be discounted in the insurance premium. This would help the dealer in selling more policies as well as earn additional revenue through AMC charges.

Policy Renewals

Handling renewals of insurance policies is yet another source of income for the automobile dealers. Studies reveal that there are several vehicles plying on our roads without insurance cover, offering a wonderful opportunity to chase renewals! Over here, the database of customers needs to be looked into to track the renewal dates of these vehicles, using smart Management Information System besides 1-2 more resources for follow-up action to convert these opportunities into actual insurance policies.

Other avenues of Insurance

Another opportunity for enhancing your revenues could be cross-selling other Insurance products like Health and Home to your customer base. Health Insurance presents a sizeable opportunity for growth followed by Home Insurance. The escalating cost of medical treatment today can put a big dent in bank balances of consumers leading to the demand for health insurance. Similarly, disasters such as the Chennai and Mumbai floods of last year will lead to people seeking insurance cover for damage against their home and assets.

At Royal Sundaram, we are totally geared and prepared for doing business in a free market environment. In anticipation of the removal of tariffs, an expert team to collate data on current and past market trends and to develop risk-based pricing and efficient marketing techniques to exploit the vast market potential, has been constituted. Closely working with leading Actuarial consultants in creating a robust technical structure that is equipped to meet the challenges of a competitive pricing environment in a free market will also be advantageous. We are utilising the global knowledge, skills and experience of our International shareholders - Royal & SunAliiance - to consider how the Indian market will react to such a significant change.

Conclusion

As far as possible, India will shortly enter the first phase of a tariff free regime through a smooth transition. The removal of tariff is going to be an exciting challenge for insurers as well as automobile dealers. The Automobile and Insurance industry can bond together to give our customers a good driving experience!