Low premium Fire insurance rates.
Is it good for the insurer?
Fire insurance premium rates, charged as per the mandatory tariff rates fixed and followed for decades in India, were de-tariffed in 2007 by the IRDAI. This was done to give freedom to insurance companies to charge appropriate rates and was thought to be a step in the right direction.
Insurance companies thought of detariffing fire insurance as a tool to capture the market. To get more clients they reduced the rates even at a loss. This discounting game went on and once reached an absurd 99 per cent discount on tariff rates in 2017-18. Whenever significant losses beyond the retention limits of the companies (which vary from Rs 5 crore to Rs 100 crore), the insurance companies reinsured it through GIC, the national reinsurer. The risk of losses were thus passed on to GIC through reinsurance arrangements.
GIC corrected rates from 1 March 2019
In March 2019, GIC woke up to the reality. To correct the situation, it told the insurance companies that they can not pass on the risks for reinsurance unless a premium rate based on the burning cost for various industries published by the Indian Insurance Bureau of IRDAI is charged with suitable loading for administration costs. The companies fell in lines. These rates were many times the earlier heavily discounted tariff rates.
New Fire policies from 1 April 2021
From 1 April 2021 in IRDAI introduced three new fire insurance policies. These were for dwelling units and business units of specific sizes. These policies provide for higher coverage than the Standard Fire and Special Perils policy. Every insurance company had to file these three new products with IRDAI along with the premium rates to be charged before marketing these policies. One thought the premium rates would be more than IIB rates because the coverage is more. But surprisingly, even though the companies charged introductory rates nearer the IIB rates, they started giving ‘discounts’ for various ‘Good Features’ like installation of adequate fire fighting equipment, sprinkler systems… This has thrown open another window for discounting: companies are now competing to give discounts and will reach the pre IIB rates level soon.
Why insurers deny or short settle claims
Insurance businesses are only a mechanism for pooling risk premiums and paying claims out of this kitty. If the kitty is not adequate, it will force the insurance companies to deny or short-settle the claims. When claims are not paid on time, the businessman will be driven out of business. He will have to fight it out in courts for years, sometimes for decades, to get the claim settled.
instances of claims denied or short-settled
⊙ “A popular brand basmati rice producer and exporter made insurance claims for the damage to paddy and rice inventory in a fire at its unit in Madhya Pradesh during June 2014. Paddy worth Rs 189 crore and the stocks were fully insured with a public sector insurance company. The insured filed for a claim. The claim amounted to six times its net profit of Rs 30.65 crore in 2014-15 and 63 per cent of its standalone net worth of Rs 302 crore as on end-March 2015. The insurance company rejected it. The chairman of the insured company said the insurer gave no reasons: “we had made a genuine claim, after taking advice from top lawyers, including P Chidambaram, former finance and home minister of India and Abhishek Manu Singhvi, Congress party spokesperson. We will file suits against the insurance company,” he said. The claim is before the court today.
⊙ A bonded warehouse in Chennai was storing goods of various customers in its godowns. It called for premium quotes from multiple companies. The selected company assessed the risk, collected the premium and issued the
policy. In 2010, a major fire accident destroyed the goods of several customers valued Rs 100 crore. The insurance company denied the claim on the ground that some customers had stored hazardous chemicals which was not disclosed. The company did inspect the warehouse and the goods stored but it did not raise any query on the nature of goods stored nor specify any condition in the policy.
⊙For a long time a factory in Kochi making rubber conveyor belts and allied products was taking fire policies for their machinery and stocks. In August 2018, heavy floods washed away most of these, including some of the accounts records. The accounts of this profit-making company had to be reconstructed. The claim was made for Rs 18 crore and a reputed Chennai-based surveyor recommended a payout of Rs 12.15 crore. The insurance company did not accept the surveyor’s report and appointed a forensic auditor. This man spent just a few hours in the factory, asked for some documents and unilaterally reduced the claim. The insurer credited the client’s bank with Rs 2.39 crore without any reasoning. The insured could get a copy of the auditorsreport only on filing a petition under the RTI Act. The dispute over short settlement is now in arbitration.
⊙ In the case of a fire loss in a popular silk/jewellery showroom in Chennai, the claim of more than Rs 100 crore was denied on the ground that the owners had not adhered to building regulations; this was not a condition mentioned in the policy.
The root cause for such denials is the lack of adequate premiums charged while issuing the policy. Mindless discounting is surely a recipe for disaster. This discounting game will take the industry to pre March 2019 levels. One is bound to see more repudiation of valid claims.
Only when a viable premium is paid, a businessmen can stake a claim for prompt and reasonable settlement. In an article purchased cheap and much below cost, quality will remain suspect.
By M.Ramadoss. The author is former CMD, Oriental Insurance Co Ltd
Rapid expansion of health insurance
A decade ago, V Jagannathan persuaded the Andhra Pradesh and Tamil Nadu governments to provide health cover to large sections of their citizens. The chief ministers of these states were convinced and set apart liberal funds in budgets. In Tamil Nadu, the KalaignarKappeetuThittam provided insurance cover for a wide range of surgeries for a sizable section of the population (estimated around 60 per cent). Under G Srinivasan, who headed United India Insurance Co., the scheme was brought under the four public sector general insurance companies and recorded rapid expansion. These offered relief to several thousand families, providing them access to high-class medical facilities provided at the government and private hospitals. Prime minister Modi extended and expanded this concept to the all India level under the Ayushman Bharat Scheme, providing relief up to Rs 5 lakh per surgery.
In recent months health insurance has been expanding rapidly. There was even hope for insurance companies making a modest profit on health insurance. However, this has been belied due to the massive surge in claims due to the Corona pandemic. Group medical insurance also contributes to losses because of inappropriate pricing. – SV
Bleeding motor insurance…
Motor insurance along with Health insurance are the fastest growing sectors in India. Unfortunately both these segments account for the sizable losses of the general insurance companies [GIC]. Motor insurance is mostly collected at the point of sale of new vehicles. With the massive increase in the number of new vehicles registered, volumes expanded. Still, the renewal of insurance policies was not routinely done. An executive of a leading general insurance company pointed out that most two-wheelers and even large numbers of commercial vehicles plied even without the mandatory third party insurance. IE has been suggesting focus on computerisation of data relating to motor insurance and relate this to the total number of vehicles operated.
For years the claims ratio on motor insurance has been adverse i.e for Rs 100 collected as premium, for most companies, claims settled were far higher, leaving the companies in the red. – SV
