De-tariffing of General Insurance Market
(Supplement to Non-Life Study Courses for Associateship Examination)
Contents Page No.
Chapter I Introduction 2
Chapter II Impact of Tariffs 4
Chapter III The process of De-tariffing 7
Chapter IV Underwriting aspects of General 17
Chapter V General Insurance Product 21
Classification & Pricing
Chapter VI Managing the Transition 25
(Note : Pending updating of Study Courses, this Supplement is issued to provide the
students with an outline of recent developments in insurance law and practice)
Page 1 of 30
1. Insurance in India started without any regulations in the nineteenth century of
British colonial era. After the independence, the Life Insurance was nationalized
in 1956, and then the general insurance business was nationalized in 1972, with 4
insurance companies operating under the supervision of General Insurance
Corporation of India. It was expected that the subsidiary companies would
provide effective competition to each other. For more than two decades, the
subsidiary companies have acquired considerable experience, expertise and
financial strength and have also established reasonable standards of conduct of
Reforms in the Insurance Sector
2. In furtherance to the financial reforms, recognizing that insurance is an important
part of the overall financial system, Government of India has appointed a
Committee on Reforms in the Insurance Sector in 1993. The committee (known as
Malhotra Committee) had recommended the opening up of insurance sector to
competition stating that introduction of competition will result in better customer
service and help improve the variety and make competitive the price of insurance
3. At that time, life and general insurance companies were state monopolies with
very little competition. In its report, the Committee recommended that the area
under tariffs should be progressively reduced with the object of limiting it to only
few classes and expected that this will promote competition and improve
4. In Chapter V on Insurance Product Pricing, Part II General Insurance, the
Committee had recommended the following steps to be taken immediately for
more equitable product pricing :
a) Claims costs should be controlled by improved application of loss control and
risk management techniques;
b) Concerted efforts should be made to comprehensively review and reduce
management expense ratios;
c) Motor premium rates should be raised in light of persistently growing adverse
motor claims experience. At the same time, structured compensation should
be provided in law to facilitate quicker settlement of claims and reduction of
cases under litigation. Insurance companies should step up their efforts to
provide quick and equitable settlement of claims so as to create a perception
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among people that their interests are better served by companies than by
d) More frequent reviews of rates in all classes of business are called for in light
of changing experience in various classes of risks. For this purpose, it would
be advisable for the companies to set up R&D Cells and upgrade statistical
information and technology support to their present product pricing
5. One of the questions that arose before opening up of insurance sector was why the
consumer of insurance services should not be provided a wider choice so that he
can get the benefits of competition in terms of range of insurance products, lower
price of insurance covers and better customer service. Though nationalized
insurance companies have done a commendable job in extending their presence
across the country, there was still a vast untapped potential and it was expected
that arrival of new players should speed up the spread of insurance. Finally,
Malhotra Committee in its Report, recommended for opening of the insurance
sector to private players with an independent regulator towards development of a
6. Consequently, on April 19, 2000 Insurance Regulatory and Development
Authority bill was passed creating IRDA to protect the interest of the
policyholders, to regulate, promote and ensure orderly growth of the insurance
industry and amended the Insurance Act, LIC Act and General Insurance Business
Nationalisation Act thereby ending an era of exclusive privilege of the state
owned companies from doing insurance business in India. New private players
thereafter were licenced to enter the market and it was expected that with their
innovative approaches and better use of distribution channels and technology, they
would make a mark along with established public sector companies in the Indian
Insurance Market for better service and faster growth.
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IMPACT OF TARIFFS
The era of tariffs
1. The price of an insurance product is linked to the scope of the cover. The tariff
mechanism provides floor rates for various insurance products based on estimates
of average of all losses across insurance companies, average administrative costs
including commissions and average expected profit.
2. In India, the Tariff Advisory Committee (TAC) established under the Insurance
Act 1938 is vested with the functions of administering the rates, terms, advantages
and conditions in the general insurance business which are under tariff. The major
classes of general insurance business under tariff regime as in 2006 before
detariffing of the market were Fire, Petrochemicals, Engineering and Motor. The
endeavor has been to ensure that the rates are fixed appropriately and equitably
keeping in mind the interests of both insurers and policyholders through a
scientific method of rating.
3. Upto 1972, some data was being received at TAC from the insurers. After
nationalization in 1972, the data flow reduced. Further, there was no system of
dissemination of data to the public. Even the four public sector insurers were not
able to publish consolidated data on each class of insurance. Thus scientific rating
became a casualty. As a result pricing of different classification of risks was done
in an ad-hoc manner. This resulted in cross subsidization among different class of
risks and also within a class the better risks subsidizing the loss making risks.
4. Apart from this, the insurer in a regulated market did not have flexibility in
pricing or innovation of products as they had to adhere to the terms and conditions
of the tariff in letter and spirit. With the standardization of covers, freezing of
rates, terms and conditions, there was little choice available to the insuring public
in terms of products and prices. Thus, while the parameters or risk factors fixed in
the tariff were adhered to for rating purposes, new and emerging risk factors could
not be dove-tailed into the tariff for want of data on those factors. On the
customers’ side, there was a perception that the better risks were being charged as
much premium if not more than those for the high risk ones. In short there was no
distinction between good risks and bad risks as the same rate applied to all.
Post IRDA Act 1999
5. IRDA Act was enacted with the objective to protect the interests of insurance
policy holders and to regulate, promote and ensure orderly growth of the insurance
industry. Though the benefits of liberalization can be seen with increase in
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volumes of premium, there was little innovation in the tariff driven General
Insurance business. Even after the opening up of the insurance sector, the general
insurance business was predominantly governed by the tariffs prescribed by TAC.
6. Considering prevalence of such tariffs against the principles of competition, there
was a constant demand from insurers and other industry experts to abolish the
tariffs. However, sudden removal of tariffs can result in unhealthy price-wars
thereby affecting the solvency of the company itself. It means that there is need
for sustainable growth on scientific lines and enhanced customer satisfaction.
Motor Insurance – The Loss making portfolio in a regulated set up
7. Generally the countries with a tariff regime and with a controlled market tend to
have higher premium than those of the free market. In India, however the situation
has been different. The motor premium rates are among the lowest in the world.
The average motor premium ranges from 2 to 3 per cent of the value of the
vehicle as compared to 8 per cent in western countries. This is due to the absence
of data in the Indian market to support a justifiable pricing mechanism.
8. However, the older insurers, who had a market share of more than 80% were
unable to generate adequate database to enable scientific calculations for risk
assessment and rating of different groups of vehicles. Therefore, underwriting in
the transport sector was perceived to be a losing proposition, with claims well
over 120 per cent of the gross premium income. The net result was that the
administered pricing became flawed in the absence of data. For the same reason,
the commercial vehicle operators, users, lobbyists, Government or the Courts
could not be convinced to approve increase in rates even in the wake of
deterioration of claims experience of the insurers.
9. Traditionally, the following lines of business were governed by tariffs prescribed
by Tariff Advisory Committee (TAC):
S.NO. Department Policy
1 Fire All India Fire Tariff
Industrial All Risks Tariff
CL (Fire) Tariff
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2 *Marine Hull * Tariff for Ocean-Going vessels
* Tariff for Dredgers
* Tariff for Fishing Vessels/ Trawlers
* Tariff for Sailing Vessels
* Tariff for Jetties/Cranes/Pontoons Insurance
* Tariff for Builders’ Risk Insurance
* Tariff for Ship Repairers’ Liability
* Tariff for Charterers’ Liability
* Tariff for Ship Breaking Insurance
3 **Marine Cargo **Tariff for Marine Cargo
4 Engineering Erection All Risks/Storage-cum-Erection
Contractors’ All Risk Insurance Tariff
Machinery Breakdown Tariff
Boiler Pressure Plant Tariff
Civil Engineering Completed Risk Tariff
Contractors’ Plant and Machinery Tariff
Electronic Equipment Insurance Tariff
Deterioration of Stocks (Potatoes) Tariff
Loss of Profits (MB & BLOP)*** Tariff
5 All India Motor Act Policy
Tariff Private Car Package Policy
Motorized Two Wheelers’ Package Policy
Commercial Vehicle Package Policy
Motor Trade Package Road & Transit Risks
Motor Trade – Internal Risks only Policy.
* Detariffed w.e.f 1st April, 2005
** Detariffed w.e.f 1st April, 2004
*** MB – Machinery Breakdown; BLOP – Business Loss of Profit
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THE PROCESS OF DE-TARIFFING
Evolution of De-tariffing Concept
1. In a competitive market, the products need to be priced equitably based on their
individual risk experience which was not practiced due to tariff restrictions. It was
alleged that tariffs were rigid based on out-dated statistical data, and that premium
rates were not revised in response to the market dynamics. It resulted in heavy
cross subsidy of premium for those lines of business which had persistent high
claims ratio, for e.g. Motor Third Party.
2. In other profitable portfolios, tariff rates were higher than rates for similar risks in
other parts of the world. Hence, General insurance companies and other
stakeholders in the insurance market had been voicing the demand for the removal
of tariff as the existence of tariff was considered contrary to free market principles
and insurance products need to be priced based on free market forces.
Reasons for transition to detariff regime
3. Pursuant to liberalization and the entry of private insurers, the motor underwriting
scenario changed drastically. On one hand the private players refrained from
underwriting the loss making areas such as stand alone liability policy and on the
other, they clamoured for detariffing of motor portfolio. They also had in place
sophisticated IT set ups and systems capable of statistical analysis of various risk
factors over and above the ones prescribed by the motor tariff.
4. The awareness among customers in the wake of liberalization also resulted in a
movement towards risk based rating rather than a rigid tariff structure.
Representations have been received by the IRDA that insurers were not willing to
offer Mandatory Third Party Liability cover and that there were loading the own
damage policies. The response of the insurance companies was that the third party
liability insurance was not a viable business without cross subsidizing with the
premia from own damage portfolio.
5. The Authority has accordingly considered moving to a tariff free regime in a
phased manner. To begin with, by notification dated 31.10.2002, it constituted a
Committee under the Chairmanship of Justice T.N.C. Rangarajan to examine the
various aspects of motor underwriting including de-tariffing and pooling
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Rangarajan’s committee on Motor Insurance
6. The Committee assisted by members representing the insurance companies,
automobile manufactures, car owners, truck operators consumers, policyholders,
surveyors, an advocate and a representative of the Government of India has
studied at length on the issues and difficulties faced by various interests of the
industry. Third party liability insurance being the only way of funding social
security, worldwide, the system of compulsory vehicle insurance is followed.
7. The report has mentioned the advantages, of, and fears, that were expressed on the
The advantages projected are:
Competition will improve efficiency
Efficiency will lead to reduction of premia and benefit policyholders
It is part of the reforms towards liberalized economy.
The fears apprehended are:
De-tariffing may make insurance unavailable at reasonable premia.
Companies may form cartels and jack up the premia
Free market may lead to insolvency of companies and loss of protection for
8. The problems relating to the own damage portion of the motor tariff have been
examined by a committee. Suggesting for de-tariffing, the committee stated that
liberalization means allow the market to function in the competitive environment.
It expressed hope that competition would improve efficiency and consumers will
benefit by not only price reduction but also value addition while industry may
benefit by introduction of newer technology and innovation.
9. It added that if competition is allowed by de-tariffing, companies would be
interested in marketing their products innovatively and with cost cutting may
reduce the premia to gather a wider market share. However, de-tariffing requires
safeguards for uninsurable vehicle owners. There should be a mechanism for an
appeal to an insurance pool which would consider proposals rejected by the
companies and grant insurance on premium loaded according to risk perception.
10. At the end of their study, the Committee recommended that the IRDA may:
a) Quarantine the Third Party liability insurance business and its accounting in
insurance company’s books;
b) Request the Government of India to review the statutory liability for third
party liability for motor vehicle accidents;
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c) Set up an independent data bank under TAC and compel the companies to
supply the data to the bank, and draw on the bank data to justify proposed
d) De-tariff the own damage business of motor portfolio under a competitive
premium setting model by a file and use procedure with a time frame for the
Steps taken by IRDA (For Motor)
11. As the committee after examining various alternatives finally concluded that the
initial step in regard to de-tariffing of the premium structure could be undertaken
in the case of the own damage portion of the motor insurance, a meeting of all
CEOs of the general insurance companies was held in Hyderabad on 6th of May,
2003. The meeting agreed unanimously to usher effective 1st of April, 2005 a
system of free pricing on the own damage portion of the motor liability.
12. As a follow up of the recommendations made in the report of Justice Rangarajan
Committee, Authority constituted a committee under the chairmanship of Shri
S.V.Mony for preparing a roadmap to detariffing of the premium structure of Own
Damage portion of the Motor Insurance.
13. However, in order to derive the rates in a scientific manner based on market
dynamics, it is essential to have accurate data on the different lines of business,
which was abysmal in the general insurance industry. The insurers were unable to
generate adequate database to enable scientific calculations for risk assessment
and rating of different groups of vehicles. There is a dire need to have a data-base
for free-pricing of products, for which it is essential to collect, compile,
disseminate and analyse data relating to different classes of risks. Hence, the de-
tariffing of Motor OD Business could not take off on 1st April, 2005, as proposed
earlier and the general insurers expressed that the de-tariffing should take place
across the board for all business portfolios instead of Motor (OD).
A small beginning
14. Pending the issue of de-tariffing of motor (OD) insurance, Tea Crop Insurance (2)
Cardamom Insurance (3) Coffee Insurance(4) Rubber Insurance (5) Package
policy for exporters under Duty Exemption Scheme were de-tariffed w.e.f
01/04/04 vide TAC circular no:M.Cargo/Cir-1/2004 dated 3rd March, 2004, and
all the non-life insurance companies were advised to file the products with IRDA
under ‘File and Use’ procedures of Authority.
De-tariffing of Marine Hull Insurance
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15. Continuing the spirit of competition, vide circular Ref No. IRDA/CIR/Mrn-
Hull/086/Mar-05, dated 23rd March, 2005, All general insurers who wish to write
marine hull class of business were allowed to go out of the tariff from 1.4.2005.
However, it was mandated that they shall follow the existing policy wordings,
terms and conditions including clauses such as the Institute clauses till further
orders. On the other hand the terms & conditions for the war risk insurance policy
shall be identical to the existing Government of India Scheme until further orders,
which continues till date.
16. To fill up the gap of non-availability of accurate data for proper pricing, as a first
step, IRDA in consultation with the insurers devised new formats for collection of
past data as well as future data in the field of motor and health insurance. New
formats were devised taking into account various risk factors hitherto not
considered by the rigid tariff structure.
17. The salient features of the new format for collection of motor data were the
introduction of various code masters. The code masters relate to i) Insurer, ii)
Policy, iii) Class of vehicle, iv) Make of vehicle, v) Zone, vi) Cubic Capacity
(CC)/Passenger Carrying Capacity (PCC)/Gross Vehicle Weight (GVW) vii)
Nature of loss, viii) Nature of goods, ix) Permit, x) Road Type, xi) Driver type,
xii) Driver Age, xiii) Driver experience, xiv) Driver education, xv) Incurred
claims experience, xvi) Claims History of the vehicle, xvii) Nature of injury,
xviii) Occupation, xix) Reasons for Court Hearing and xx) Type of Summons.
These formats covered the details on driver, geographical zone of driving and the
vehicle which are indispensable for rate fixing in equitable manner in a detariff
Road map for a tariff free regime
18. With the intention to ensure that there is an orderly movement from tariff regime
to the future set up, on 23rd September, 2005, IRDA circulated a detailed note to
all general insurers outlining the various steps to be taken by insurers for
movement to a tariff-free market. Considering the existence of tariffs contrary to
free-market forces, the road map has emphasized the need for strengthening
internal capabilities of insurers.
19. It has enunciated the various steps to be taken by insurers in the following areas :
The function of underwriting and rating of insurance business should be
independent of business development function and not be made
subservient to the business development function. The underwriters should
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be specially trained in evaluating risks, securing required inspection
reports or risk evaluation reports, underwriting and rating of the risks and
determining the terms and conditions of cover.
ii) Rating of risks:
Absence of statistical data for rating support is a widespread malady in the
general insurance industry. It is hoped that with the active involvement of
the Appointed Actuary in the process of product design and rating, this
deficiency will be minimized.
The appointed actuary in association with senior underwriters of the
insurer, will be responsible to list out the rating factors to be looked at for
every sub-class of business and every type of risk. He will not only be
responsible for drawing of internal guide tariffs, but also work with IT
Department to design the system for collection and compilation and
analysis of data on premium and claims by the several risk factors. Such
analysis will serve as the technical input to nominated underwriters.
iii) Policy terms and conditions:
All insurers will continue with the policy terms and conditions as per the
existing tariffs for some more time and thereafter, IRDA will look at the
changes from the point of view of the simplification of the language of the
cover, underwriting prudence and technical soundness of the changes.
However, where the risks are rated based on international market terms,
the terms and conditions that are acceptable to reinsurance market of
repute will continue.
iv) Corporate governance:
Every report of the CEO to the Board of Directors on the business
development must also comment on the emerging claims experience of the
business and adequacy of the current underwriting and rating levels. Such
reporting needs to be done atleast one every half year.
It has also stressed on the indispensable need towards development of
quality database that is essential for rating of risks based on sophisticated
actuarial/statistical analysis and set a time schedule for implementation of
the milestones indicated therein.
20. With the abolition of tariffs, the role of Tariff Advisory Committee will undergo a
change and it will act as a Data Repository for insurance industry.
Exposure Draft Guidelines on File & Use procedures:
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21. After notifying the road map, the Exposure draft on File & Use guidelines
prepared by IRDA was placed on the website of IRDA seeking comments of
insurers and industry for filing of products, to be filed once de-tariffing takes
place. The guidelines were discussed at length and the responses were
consolidated for finalizing of the guidelines.
Guidelines on File & Use procedures for general insurance products:
22. Based on the feedback received on the exposure draft guidelines on File & Use
procedures, and by virtue of powers vested in the Authority under Sec.14(2)(i) of
the IRDA Act, 1999, Circular 021/IRDA/f&u/Sep-06 was issued on 28th
September, 2006 by IRDA enumerating the File & Use requirements for general
23. One of the pre-conditions for acceptance of products filed with the Authority is
only after the insurer has filed the Underwriting Policy as approved by its Board
and satisfied any queries raised by IRDA thereon.
24. IRDA requirements for consideration and review of products under File & Use
guidelines along with underlying logic are as under:
(i) Design and rating of products must always be on sound and prudent
underwriting basis. The contingencies insured under the product should be clear
and provide transparent cover which is of value to the insured.
Prudent underwriting means that the insurer should only offer insurance of risks
that are quantifiable and manageable and where the premium can be properly
assessed. The cover should be clearly defined and should provide cover that is
of value to the person insured.
(ii) All literature relating to the product should be in simple language and easily
understandable to the public at large. As far as possible, a similar sequence of
presentation may be followed. All technical terms should be clarified in simple
language for the benefit of the insured.
There should be no effort to mislead the reader to assume that the product is
offering protection that it really does not, or that it offers such protection
subject to limitations and conditions that are not easily apparent.
(iii) The product should be a genuine insurance product of an insurable risk with a
real risk transfer. “Alternate risk transfer” or “financial guarantee” business in
any form will not be accepted.
Insurers are not expected to offer financial guarantees or other contracts that
are called as insurance but are in fact, lending arrangements. Insurances which
guarantee the financial performance of the person insured are not permitted.
Invariably, the event insured should be an unforeseen occurrence not under
control of the insured. Any indirect insurance products such as insurance
derivatives may not also be permitted.
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(iv) The insurance product should comply with all the requirements of the Protection
of Policyholders’ Interests Regulations 2002.
In case of some personal lines products, there should be provision to inform the
policyholder well in advance of expiry date if his insurance is not to be renewed.
Where renewal is offered subject to terms being mutually agreed, it should not
be treated as a means of avoiding renewal by insisting on very high renewal
premium. In respect of products using telemarketing or e-selling as channels,
particular attention should be paid to the safeguards to be taken to prevent
improper selling practices.
(v) Insurers should use as far as possible, similar wordings for describing the same
cover or the same requirement across all their products. For example clauses on
renewal of insurance, basis of insurance, due diligence, cancellation, arbitration
etc., should have similar wordings across all products.
Wordings should be in simple language that is easy to follow. Where renewal is
not automatic in a class of business where there is an expectation of continuity
such as health insurance, the prospectus should clearly say so. The policy
should provide simple disputes resolution procedures and also state in simple
language the process of arbitration of disputes.
(vi) The pricing of products should be based on appropriate data and with technical
Where the proposed schedule of rates are derived from an existing schedule of
rates irrespective of whether or nor the class of business is a tariff class, there
should be adequate statistical information on the claims experience at current
schedule of rates. Where the rates are based on the generally prevailing market
level of premium rates, the insurer should be able to demonstrate the
reasonableness of the variation from the currently prevailing level of rates.
Where the rates proposed are based on reinsurance market level of rates, the
insurer should be able to demonstrate that the rates of the reinsurance markets
have been properly ascertained and represent rates quoted by reinsurers of
repute. Where the rates are based on non-insurance technical data, the insurer
should be able to defend the logic underlying the establishment of the estimated
claims costs from which the rates are derived. It is permissible to have two sets
of rates, namely rates subject to payment of agency commission and net rates
where the client comes direct. However, the insurer should make due allowance
for the expenses it will incur for doing the work that an agent or broker will do
when the business comes through him.
(vii) The terms and conditions of cover shall be fair between the insurer and the
The conditions and warrantees should be reasonable and capable of
compliance. The exclusions should not limit cover to an extent that the value of
insurance is lost. The cover provided should be of value to the policyholder and
should offer needed protection. The policyholder should not be forced to buy
covers that he does not need as a pre-condition of being granted cover that he
needs. The time allowed for reporting of claims should be reasonable. The
policyholder should not be required to do things that are onerous after a claim
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to maintain his eligibility for protection nor should the policyholder be
prevented from resuming his business expeditiously by the claims process.
(viii) Margins built into rates shall be consistent with the experience of the insurer in
respect of commission, management expenses, contingencies and profit.
The margin for commission built into the rates should be that level at which
commission or brokerage will be paid. The commission margin should not be
unreasonably low because it will distort the sales process and there will be an
incentive to hide payments to agents and brokers under different heads. While
the law only states the maximum rates of commission that can be paid, it is open
to insurers to design products with lower rates of commission so long as the
manner of marketing such a product can be sustained at the low rate of
commission built into the rates.
(ix) Insurer should take necessary steps in ensuring that competition will not lead to
unprincipled rate cutting and other improper underwriting practices.
Although this is a statement of the obvious, the fact that an insurer has to
provide such a confirmation should act as an indirect deterrent to improper
Final take off
25. Thereafter, vide IRDA Circular Ref. No. 034/IRDA/De-tariff/Dec-06, dated
December 4, 2006, the Authority has confirmed withdrawal of tariffs effective
from 1st January 2007. It was reiterated that the tariff general regulations, other
than those relating to rating viz. terms, conditions, clauses, warranties, policy
wordings etc. shall continue to be followed until further orders.
26. In case of the mandatory motor TP, where the insurers have been expressing
difficulty to underwrite unless they are permitted to charge the premium that they
consider appropriate (which means heavy premium in commensuration with high
claim ratios of motor portfolios) rates are prescribed by regulator. The Authority
has issued an Order directing insurers that they shall not refuse cover for third
party risks. The underlying reason for existence of price regulation is consumer
pressure to avoid enhancement of premium and to ensure that insurers shall
provide motor third party liability insurance cover to all vehicles.
Formation of Motor Third Party Insurance Pool
27. A direction under Sec. 34 of the Insurance Act was issued by IRDA stating that all
general insurers registered to carry on general insurance business including motor
insurance business or general reinsurance business shall collectively participate in
a pooling arrangement with the following provisions to share in all motor third
party business written by any of the registered general insurers:
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1. Participation in pooling arrangement: Every insurer registered to carry on
general insurance business (including motor insurance business) or general
reinsurance business shall automatically participate in the pooling
arrangement to the extent set out herein.
2. Underwriting insurers: Every underwriting office of every insurer that is
authorized to underwrite motor insurance business for the insurer shall also be
authorized to underwrite motor third party insurance business that will be
shared among all insurers through the pooling arrangement.
3. Pooling mechanism: The pooling of business among all insurers will be
achieved through a multi-lateral reinsurance arrangement between the
underwriting insurer and all the other registered insurers carrying on general
insurance business (including motor insurance business) and general insurance
4. Participation in motor third party insurance pooled business: The participation
of General Insurance Corporation of India (GIC) in the Pooled business shall
be such percentage of the motor business that is ceded to it by all insurers as
statutory reinsurance cessions under Sec 101A of the Insurance Act. The
business remaining after such cession to GIC shall be shared among all the
registered general insurers writing motor insurance business in proportion to
the gross direct general insurance premium in all classes of general insurance
underwritten by them in that financial year.
5. Underwriting of business: Underwriting offices of insurers shall follow the
underwriting instructions of the General Insurance Council in the matter of
procedures for underwriting and documentation and accounting and settlement
of balances. The business shall be underwritten at rates and terms and
conditions of cover as notified by the Authority from time to time. No vehicle
owner shall be denied third party insurance cover in respect of his vehicle
which is holding a valid permit for use on public roads except on grounds of
6. Claims processing and settlement: All claims in respect of third party death or
injury or physical damage shall be processed for settlement in a speedy and
efficient manner in accordance with the instructions of the General Insurance
Council. For this purpose, the Council shall adopt a pro-active claims
settlement policy adopting the most efficient claims processing practices
7. Administration of the Pooling arrangement: The GIC shall act as the
administrator of the pooling arrangement. It will act under the guidance of the
General Insurance Council. For this purpose, the Council may establish such
Committees of insurers as are necessary to operate the Pooling arrangement
and process and settle claims in the most efficient manner.
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8. Remuneration: There will be no agency commission or brokerage payable in
respect of motor third party insurance business. The underwriting insurer will
be paid a reinsurance commission of 10% on the premium ceded by it to all
the other insurers and reinsurers. The GIC as administrator shall be paid a fee
of 2.5% of the total premium on motor third party insurance business in
respect of the business underwritten for the pooled account. Each insurer shall
bear the cost of hardware required to operate the pooling arrangement within
its offices. The GIC will bear the cost of hardware necessary to administer the
pooling arrangement in its offices. The cost of the operating software for the
pooling arrangement shall be shared by all the insurers and reinsurers in the
manner decided by the General Insurance Council. Each insurer shall bear the
cost of travel of its executives to attend to the work relating to the pooling
arrangement. However, any travel specifically to service a claim shall be
recoverable as claims related expenses.
9. Agreement: The insurers and GIC shall enter into a multi-lateral reinsurance
arrangement to give effect to this pooling scheme.
10. Review: The Authority will review the operation of the pooling arrangement
and the need for regulation of the premium rates and terms of cover and will
issue such directions from time to time as may be considered necessary.
28. It is the responsibility of the CEO or any other senior officer designated for the
purpose of the compliance of the File & Use guidelines. However, the insurer
shall also appoint a senior as Compliance officer to ensure compliance with the
requirements of the File & Use guidelines.
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UNDERWRITING ASPECTS OF
Back to Basics
1. Insurance is a form of risk transfer mechanism for dealing with one aspect of risk,
i.e. the transfer of the financial losses caused by the occurrence of uncertain
Risk management consists of 6 steps viz. Determination of objectives, risk
identification, risk analysis, risk assessment and implementation. Insurance is a
mechanism through which the risks can be transferred from individuals to groups
at a defined price called premium. The losses of a few whenever occur are paid by
many, out of the fund collected by way of premium. In simple terms, insurance
spreads the economic burden of losses throughout the group.
2. General insurance policies are intangible products which promise to pay losses
that may arise in the event of occurrence of an unforeseen peril. In other words,
the delivery of promise is contingent in nature. The idea of fixing a tariff is
essentially to see that the insurance companies do not charge such low rates as to
be unable to meet the liability when a claim is made.
Re-inventing the principles of Underwriting
3. The purpose of underwriting is to assess the extent to which the risk presented
departs in any respects from normal and if so, to what extent additional hazard can
be mitigated or can be covered and at what rating considerations. The insurers are
expected to be prudent while accepting the risks for underwriting. Prudent
underwriting means that the insurer should only offer insurance of risks that are
quantifiable and manageable and where the premium can be properly assessed.
The cover should be clearly defined and should provide cover that is of value to
the person insured.
4. Underwriting being one of the core functions of the insurers, it is essential that the
Board should be involved in deciding the underwriting philosophy of the company
in the matter of the underwriting profit expectation.
5. The underwriting policy placed before the Board inter alia shall cover:
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a) The underwriting philosophy of the company in the matter of the
underwriting profit expectation;
One does not expect any insurer consciously to underwrite business at a
loss. However, a small underwriting profit margin is acceptable in case of
a class of business that does not have a significant exposure to
catastrophe losses. One can also accept an insurer taking credit on a
conservative basis for any investment income in a long tail class of
business such as Motor Third Party liability on a proper and statistically
b) Whether each product should stand on its own or cross-subsidy among
products sold to one client will be acceptable. [It is important for the
Board to note that even though a client’s total portfolio may be profitable
overall on gross basis, the position on net of reinsurance basis can be a
loss because different percentages are reinsured in different classes of
One does not expect any Board to approve of cross subsidy of profits over
different classes. Where cross subsidy is planned, one needs to look at the
stability on a net of reinsurance basis of the profit expectations on each
element of the portfolio. For example, it will be most unwise to use
Earthquake insurance premium to cross subsidise cargo insurance. Also,
health insurance that is retained for net account cannot be a suitable
vehicle to cross-subsidise Fire insurance of a large risk where the insurer
retains a small percentage of the risk for itself.
c) Whether the insurer will underwrite any business on a planned
underwriting loss basis and if so, how the Board will control the effect of
such underwriting on the insurer’s solvency margin and the aggregate
exposure to such losses; the Board should be conscious of the likely need
to further strengthen the capital of the insurer following underwriting
It is quite possible that when launching a new product, the insurer may
spend a substantial amount on its launch such as an advertisement
campaign or sales campaign, that may be more than the profit expected
on the business that is expected to be developed during the first year after
its launch. In such cases, it is necessary that the decision to incur more
expenses than the expected profit in the first year, is properly planned and
budgeted with the approval of the Board and monitored.
d) The margins that will be built into the rates to cover acquisition costs,
promotional expenses, expenses of management, catastrophe reserve and
profit margin and the credit that will be taken for investment income in the
design of rates, terms and conditions of cover, and how they will be
modified based on the actual operating ratios of the insurer;
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The margins must have a relationship to the actual operating ratios of the
insurer. However, in order to remain competitive in the market, the
insurer may have to match the premium levels quoted by its competitors.
When this happens, again, the financial impact should be estimated,
budgeted for with the approval of the Board and monitored.
e) The list of products that will fall into each of the 5 sub-categories listed in
para 19 of File & Use guidelines (see chapter 5); it is recognized that the
list may change from time to time, in which case, whenever a product is
placed in a category or transferred to a different category, such
modification should be reported to the Board with a copy of the note for
Board and the Board’s decision being filed with IRDA;
f) The delegation of authority to various levels of management for quoting
rates and terms and for underwriting in each of the 5 sub-categories of
products; In particular, the Board should appoint the Appointed Actuary or
Financial Adviser or the Chief Financial Officer or any other top
management executive who does not have any responsibility for business
development, to act as the moderator of rates and terms that are quoted on
individually rated risks that fall under para 19(v) of File & Use guidelines;
The basic principles governing delegation of authority are as important as
the designations of officers who are given authority. Firstly, authority
should be commensurate with the person’s technical competence.
Secondly, any decision that can have a significant effect on the company’s
exposure should be taken by consultation among at least two persons with
adequate competence. Thirdly, a person who is responsible to develop
business should also not be responsible for underwriting without sufficient
supervision by persons who have adequate underwriting knowledge and
hold no responsibility for business development. If the CFO or FA also
holds business development responsibility, obviously, he cannot act as
g) The role and extent of involvement of the Appointed Actuary in review of
statistics to determine rates, terms and conditions of cover in respect of
internal tariff rated risks and products designed for a class of clients;
The Appointed Actuary can be given a wider than purely mathematical
role in underwriting using the training that an actuary goes through in his
studies in respect of logical thinking rather than his knowledge of the
mathematics. He can play the role of a moderator on the underwriting
process in an area with little statistical support and severe competitive
pressure. It has been agreed that the person moderating the rating of risks
in the absence of statistical data can be the Appointed Actuary or the
Chief Financial Officer or the Financial Adviser of the company
h) The internal audit machinery that will be put in place for ensuring quality
in underwriting and compliance with the corporate underwriting policy;
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Until the insurers get used to working in a disciplined manner in a tariff-
free marketplace, the underwriting audit will be of critical importance to
ensure prudence in underwriting. So, it is important that a robust and
independent underwriting audit system is put in place with an
underwriting audit frequency of once every quarter as far as possible. If
insurers decide to use their existing internal audit machinery also to do
technical audit, they should ensure that the auditors are trained in
underwriting and the technical audit should be a focused audit with high
frequency in the early period after removal of tariffs.
i) The procedure for reporting to the Board on the performance of the
management in underwriting the business, including the forms and
frequency of such reports. The reporting forms must be detailed enough to
highlight any emerging problems at an early stage and enable the Board of
Directors to monitor the profitability and spread of business on an ongoing
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GENERAL INSURANCE PRODUCT
CLASSIFICATION & PRICING
1. Insurance premiums in a competitive market are driven by expected loss costs.
The key ingredients of general insurance product pricing are: a) claims cost; b)
business acquisition cost; and c) management expenses; d) margin for fluctuation
in claims experience and reasonable profit.
a) Claims Costs: The core premium is arrived based on past loss experience or
the “burning cost” arrived by using the standard formula viz. L/V * 100 where L
is the incurred losses and V is the values insured. This pure rate is normally
loaded with acquisition costs, management expenses, reserves for catastrophe
risks and final rate is arrived by adding suitable margin for profit. Since claims
cost is the major element in pricing the insurance product and as losses are
ultimately a national waste, insurance companies in co-operation with their
customers, should make concerted efforts for risk improvement, loss prevention
and claims minimization. This could help to bring down the premium rates.
Towards more equitable product pricing, the following steps need to be taken:
a) Claims costs should be controlled by improved application of loss control and
risk management techniques;
b) Concerted efforts should be made to comprehensively review and reduce the
management expenses ratio.
c) The companies should review the rates frequently in light of changing claims
experience in various classes of risks.
d) Insurers should step up their efforts to provide quick and equitable settlement
of claims so as to create a perception among people that their interests are
better served by companies than by litigation.
b) Acquisition Costs: According to the new File & Use guidelines, Margins built
into rates shall be consistent with the experience of the insurer in respect of
commission, management expenses, contingencies and profit. The margin for
commission built into the rates should be that level at which commission or
brokerage will be paid. The commission margin should not be unreasonably low
because it will distort the sales process and there will be an incentive to hide
payments to agents and brokers under different heads. While the law only states
the maximum rates of commission that can be paid, it is open to insurers to design
products with lower rates of commission so long as the manner of marketing such
a product can be sustained at the low rate of commission built into the rates.
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c) Management Expenses: Expenses of management will generally reflect the
overall expense ratio of the insurer in recent past. However, it is possible to
design products at a different margin for expenses where the insurer can
demonstrate that the expenses of management for that particular product will be
different either because of the characteristics of the potential market or the sales
mechanism or administration of that type of insurance.
d) Margin for fluctuation in claims experience and reasonable profit: A single
catastrophe event may cause severe strain on the insurer’s funds. Hence, insurers
shall not be designing products at very low margins merely to beat competition.
However, an insurer can consciously provide lower than appropriate margins in
design of its product and make adequate provision to cover the deficit that is
bound to arise due to under-pricing, for an initial period as a promotional period
subject to the company being able to absorb the financial strain without affecting
its solvency margin. Such conscious underwriting at a loss should also have
approval of the Board of the Company as their underwriting policy.
2. Thus, insurer should take the above parameters into consideration while designing
the products and pricing should be based on appropriate data and with technical
justification. Once the insurer arrives at the base price, where any class of risk
may be deemed normal, the basic premium rate can be charged. However, using
the principle of discrimination, the reduction or loading can be done taking into
account the favourable and unfavourable features present in the risk.
3. However, initially, except the rating, all the other portions of tariffs will continue
till 31st March, 2008.
4. Based on the type of risks for underwriting and exposures, the Products are
classified into Class rated and individual rated products:
A. Class rated products
i) Internal tariff rated products: These are standard products that can
be sold by any of the offices of the insurer with the rates, terms and
conditions of cover, including choice of deductible where
applicable, as set out in an internal guide tariff. If the internal guide
tariff visualizes variations from the listed rates for factors either
linked to experience or based on hazard features or size of sum
insured or size of deductible or to meet competition, such
variations should also be properly documented following the same
rules and procedures. In other words, these are “rule based”
underwriting products. This category will include Fire insurance
with certain sum insured or category of risk limitations, Motor
insurance other than fleets, Personal Accident insurance other than
groups, Health insurance other than groups, Burglary insurance,
Fidelity insurance and so on.
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ii) Packaged or customized Products: These are products specially
designed for an individual client or class of clients, in terms of
scope of cover, basis of insurance, deductibles, rates and terms and
conditions of cover. These will include insurance packages like
Homeowner’s Comprehensive or Shopkeeper’s Comprehensive or
Banker’s Blanket insurance and so on.
B. Individual rated products
iii) Individual experience rated products: These are products where the
rates, terms and conditions of cover are determined by reference to
the requirements of and the actual claims experience of the insured
concerned. These will typically be insurances with a high
frequency but low intensity of loss occurrence. This will include
Cargo insurance, group insurances for PA or Health, Motor fleets,
Hull insurance and so on.
iv) Exposure rated products: These are products where the rates, terms
and conditions of cover are determined by an evaluation of the
exposure to loss in respect of the risk concerned, independent of
the actual claims experience of that risk. Typically, these will be
risks where the occurrence of a loss is an uncommon event or
where there are very few risks of that class to develop a statistically
supported rating basis. The exposure rating may derive from rates
for similar risks in other markets or be based on hazard evaluation
done for other reasons such as for risk management. This will
include insurance for earthquake risk, Public Liability insurance for
high hazard occupancies and so on.
v) Insurances of large risks: For the purpose of these guidelines, large
(1) insurances for total sum insured of Rs.2,500 crores or more
at one location for property insurance, material damage and
business interruption combined;
(2) Rs.100 crores or more per event for liability insurances.
5. These are typically insurances that are designed for individual large clients and
where the rates, terms and conditions of cover may be determined by reference to
the international markets. According to the new File & Use guidelines, it is not
permissible to place a product under this category by merely referring to a
reinsurer for the rates and terms. It should genuinely relate to risks that are not
within the underwriting or rating capability of Indian insurers. Merely because an
insurer places facultative reinsurance on a policy will not make it a large risk. The
property insurance of an insured requiring liability insurance for Rs.100 crores
cannot become a risk falling in this category for property insurance. It is not
expected that in respect of a risk properly qualifying as a large risk, the insurer
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will reinsure out the bulk of the cover without utilization of the national retention
capacity and the insurer’s own automatic facilities. Reinsurance is expected to be
placed abroad solely on a need-based basis and only after satisfaction of the
national retention capacity.
6. It is expected that in respect of such products, the insurer will quote terms in line
with the terms quoted by reinsurers including the extent of cover and deductibles
or claims conditions.
7. If the insurer varies the terms quoted by the reinsurers while quoting the terms to
the proposer, such variation of terms and any increased retention that results from
it, shall be consistent with the underwriting policy and reinsurance policy
approved by the Board for underwriting of business and also for retention and
reinsurance. The insurer shall charge an additional premium over the rates secured
from the international market that is commensurate with the additional risk carried
by it. Such additional premium charged should have the concurrence of the officer
designated by the Board under para 15(f) above.
8. Full particulars of such cases where the insurer varies the terms from those quoted
by the reinsurer shall be filed with IRDA as soon as the terms are quoted and
where considered appropriate, IRDA may raise queries about the terms and the
premium quoted. This is the category of risks that is most susceptible to pressures
of competition and where insurers may take a rather bold stand purely because
their own stake in the risk may be small with most of it being reinsured. Insurers
may overlook the risk of reinsurance failure or even misdemeanor of the broker
that may go unnoticed until after a claim. So IRDA will look at these cases with
9. Firstly, the rates and terms and conditions of cover should appear to be reasonable
and well defined. Secondly, the brokers involved should be experienced and
reputed brokers in that field and documentation should be completed promptly
and in a satisfactory manner.
10. This is also the category of risks where some insurers have taken on enormous
exposures on their own net account. Neither the broker nor the client will be the
least bit concerned about the risks that the insurer is taking on itself. So one needs
to look at this also carefully. This is the reason why IRDA is bringing in the
Appointed Actuary or the Chief Financial Officer or Financial Adviser into the
picture to act as a moderator of the business development enthusiasm of the
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MANAGING THE TRANSITION
1. De-tarifing does not mean that the companies can set the premium whimsically. It
facilitates setting competitive premium model where there is neither excessive
pricing nor non-viable premium undercutting which may create instability. The
companies are encouraged to promote better underwriting decisions and the
products filed have to be justified with supporting data regarding the rates. If the
companies were to undercut the premium to uneconomical levels, then again they
would be brought back by the losses that they may face.
2. The Authority since its inception believed that sustainable growth in the insurance
industry is possible in an environment which values and promotes financial
stability, increased management capability and total public accountability. It is
needless to say that in order to have an increased management capability, it is
necessary that good corporate governance practices are followed in the companies
as well as with the regulator. Authority conducts off-site and on-site supervision
at periodic intervals in order to assess the soundness of the insurance company.
3. Insurance pricing is an important economic issue. With the abolition of tariffs,
maintaining underwriting discipline in the face of competition becomes more
important and critical. It is essential to ensure that the insurance business is run
fairly, is conducted by competent persons, does not result in undue losses to the
insurers themselves resulting in their insolvency and protects the legitimate
interests of the insuring public.
4. The prime focus of the regulatory monitoring is to ensure that the company does
its underwriting functions prudently on the Board approved philosophy and does
not indulge in predatory pricing. Since it is the tendency of insurers to engage in
destructive price wars for capturing market share which may lead to widespread
insurance insolvencies, regulatory intervention by way of inspection is needed.
5. There are two types of inspections, namely, general inspections and focused
inspections. Focused inspections will be mounted when there is a report of
improper underwriting of one or more risks. It may also be taken up if there are
reports of failure of underwriting controls in general. Otherwise, General
Inspection will be carried out covering all operating areas of general insurance
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Role of Intermediaries
6. The tariff regime in the general insurance market did not deter brokers for seeking
licenses. The Authority was convinced that de-tariffing is an essential prerequisite
for the healthy growth of the markets. In line with this, the Authority has
withdrawn the tariff rates and provided the insurers a one year time to get
prepared for a total de-tariffed regime where they would be free to design the
policies too. In order to ensure that the business is transacted along proper lines, it
is important to set out the rules of conduct that should be followed by both
insurers and brokers in the matter of insurance and reinsurance of general
insurance risks, especially those with high sums insured.
7. The Authority has issued the following guidelines for compliance of Brokers
being part of Code of Conduct to ensure market discipline.
1. Where a client invites more than one broker to submit terms for its
(a) A broker shall not block capacity with one or more insurers in
anticipation of being invited to quote terms for insurance requirements
of a client, where the client has not yet decided as to which brokers
should be invited to quote terms.
(b) Once the client has selected the brokers who should be invited to quote
terms, all other brokers should withdraw from the market. They should
also immediately advise any insurers with whom they have been in
touch to propose terms, about their not being invited to quote terms.
(c) Brokers who are invited to quote terms should obtain a written
appointment letter to develop terms. Where the client has given oral
instructions to quote, the broker should record the fact of its being
invited to quote terms, in a letter to the client. (Refer paras 2(f) and 2
(h) of Code of Conduct).
(d) Every broker invited to quote terms should fully comply with para 4 of
the Code of Conduct. The broker should clearly distinguish between
information provided by the client and information provided by the
broker based on its own study of the risk.
(e) Where the client has specified the terms of the insurance cover
required by it, the broker shall develop terms on the basis specified by
the client and not any other basis (which may be patched up without
the knowledge of the client) to provide the required cover. However, it
is open to the broker to discuss with the client and agree with the client
to develop terms on any other basis.
(f) It is open to the broker to ask more than one insurer to quote terms.
The broker shall furnish full information on a common basis to all the
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insurers. This does not prevent the broker from providing
supplementary information to an insurer in response to questions
raised by that insurer.
(g) Where an insurer is asked to quote terms by more than one broker in
respect of the same risk, the insurer shall quote the same terms to all
the brokers. However, if a broker seeks quotes from the insurer on a
different basis, the insurer shall be free to quote terms on the basis
requested by that broker without having to advise those terms to all the
(h) Where an insurer is approached by a broker to quote terms for a
particular account, the insurer should not approach the client directly
to quote terms and eliminate the broker.
(i) Where a client has also asked an insurer to quote terms directly to it,
the insurer may quote terms directly to the client and if any broker
approaches it for terms, the insurer should inform the broker that it is
quoting directly to the client.
(j) Where terms are developed on a “net rate” basis, the broker shall
advise the client the full facts, namely, the net rate and the addition
made for brokerage.
(k) Where the insurer needs to develop terms from the reinsurance markets
before quoting its terms to the client, the insurer shall be free to use the
services of any reinsurance broker of its choice.
(l) A composite broker shall not go to the reinsurance markets to develop
terms in respect of cases referred to in (k) above, without the written
prior authorization of the insurer invited to quote terms for the
insurance. Paras 2(i) and 2(j) of the Code of Conduct are relevant in
this connection. It is important to emphasise that placement of
reinsurance is entirely within the purview of the insurer and neither the
direct broker nor the client can direct the insurer where to place
reinsurance and how much to reinsure. This does not prevent the client
or the broker from enquiring about the insurer’s own retention on the
risk and the reinsurances that it will place and the security rating of
reinsurers to be used, as a part of its examination whether to accept the
insurer for its insurance requirements.
(m) Where reinsurance terms are developed as part of the process of
quoting terms for direct insurance, the broker who is instructed to
develop terms shall truthfully communicate to the insurer on whose
behalf the reinsurance terms are developed, the basis of the quotation,
the rates and terms and the list of reinsurers with written lines and the
extent of likely support at those terms.
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(n) A composite broker or reinsurance broker shall not put conditions of
minimum percentage of reinsurance placement as part of the quotation
or allow such terms to be put in by the client or foreign co-broker or
reinsurers. This does not prevent a lead reinsurer quoting terms subject
to his being offered a minimum stated line on the risk. It shall be open
to the insurer to instruct the broker not to offer the risk to a particular
reinsurer or to specified reinsurers or specified markets.
(o) A broker shall not put up terms developed within its own office (desk
quotes) but not received from an insurer, as insurance premium terms.
If a broker is responding to an enquiry about the likely insurance cost,
it should make it clear when indicating the premium cost that it is not a
quotation but only a non-binding indication of the likely cost.
2. Where a client retains one broker to develop terms from several insurers:
(a) The broker shall select the insurers to be invited to quote terms,
entirely from the point of view of the client and in the best interests of
(b) The broker shall provide information on a common basis to all insurers
invited to quote. However, it may provide further clarifications or
additional information in response to queries of an insurer that is
invited to quote.
(c) The broker shall not first develop terms from foreign markets and then
go round locating insurers willing to front the business at those terms.
(d) The broker shall not go round looking for insurers to be invited to
quote terms, on the basis of a minimum reinsurance order as a
condition of giving an opportunity to the insurer to write a share of the
(e) The terms put up to the client by the broker should include the original
letters of quotation from the insurers and the recommendation of the
broker should be properly documented with reasons in support of the
3. Documentation and post-insurance servicing of the direct insurance
(a) Once the direct insurance client gives orders to bind the cover, the
broker should obtain a letter of cover or cover note or insurance policy
from the insurer or insurers concerned and submit them to the client
before commencement of risk.
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(b) The broker should ensure payment of premium in a timely manner in
compliance with Sec 64VB of the Insurance Act. The broker should
explain to the client, the importance of compliance with policy
conditions and warranties by the client during the policy period.
Where the insurer issues only a cover note or letter of cover, the
broker should follow up for issue of the formal policy document
without delay. The broker should scrutinize all these documents to
ensure that they are in conformity with the terms and conditions
quoted and accepted by the client. Likewise, the broker should ensure
timely payment of reinsurance premium on any reinsurance placed
through it and follow up for the formal reinsurance document in a
Role of TAC
8. With the abolition of tariffs, the role of Tariff Advisory Committee will undergo a
change. It is expected that TAC may perform the following functions in the
- Collection of data on premiums and claims, analysis of such data and
dissemination of the results to the insurers.
- Report to IRDA on the underwriting health of the market and any
aberrations in market behaviour.
- Constitution of Expert Groups at the request of the General Insurance
Council, to look into underwriting issues and recommend necessary
- Organize training to underwriters at the market level and
- Attend to public grievances on non-availability of insurance and try to
resolve the issues by discussion with insurers.
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General Insurance Council:
9. The General Insurance Council has establishing itself as a self regulating
organization and has setup its Secretariat at Mumbai. It is expected that the
Council will function as an Industry Association, which will liaise with the
Government, IRDA and give the feedback of the industry on various issues to the
Regulator in addition to addressing market conduct issues.
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