India: De-Tariffication – The General Insurance Councils Minimum Standard Wordings

Last Updated: 7 February 2008
Article by Neeraj Tuli

In previous articles we have reported on the proposed de-tariffing of the Indian general insurance market. As of 1st January 2007 the IRDA (the Indian insurance market regulator) freed pricing within certain parameters, but Insurers were to continue using the forms approved by the Tariff Advisory Committee until 31st March 2008.

The IRDA roadmap to a detariffed market envisaged Insurers filing the policies they proposed selling in the de-tariffed regime but in recent months there appears to have been a re-consideration of whether complete de-tariffication will in fact take place. India's General Insurance Council (GIC), which is a statutory body established under §64C of the Indian Insurance Act 1938 and represents the collective interests of the non-life Insurance companies in India, was given the responsibility of developing Standard Market Wordings for fire, engineering and motor risks to be followed by Insurers after de-tariffication. The GIC says its objective is the 'smooth transition of the market from tariff to tariff-free regime; assurance of minimum standards to buyers of insurance; clarity of policy terms and conditions and avoidance of differing interpretations; bringing in best global practices'.

The GIC has now published its proposed Minimum Standard Wordings (MSW) for fire, engineering and motor risks and says these wordings 'have been developed, as base level with scope for customisation through endorsements for addition/deletion of covers'. Endorsements have also been drafted by the GIC.

Although the wordings are lengthy and currently under review by various interested sections of the market, and although the GIC has said that the MSW are not intended to restrict insurers from creating their own wordings, some fundamental questions have already been raised in a number of quarters by reference to the GIC's stated objectives.

In terms of achieving a 'smooth transition of the market from tariff to tariff-free regime' the more liberal elements of the market have asked why the MSW is needed at all. Those who believe in the principle of allowing the market to determine wordings, subject of course to oversight by the IRDA, ask whether the publication of such MSW is not simply 'tariff lite'.

The laudable intention of an assurance of minimum standards for the insurance buying public has also been drawing comment. Apart from the absence of any discernible public demand for MSW, the fact remains that insurers wishing to sell and policy in the de-tariffed regime will first have to file it with the IRDA and get it approved before being able to market the policy to the public. The public appears to have taken well to new Insurers post-liberalisation in 2000 and to the new products these insurers have offered – in the life and general field – without expressing concerns over the supposed absence of minimum standards in the form of MSW. Those minimum standards have hitherto been apparently satisfied by the File & Use procedure for all policies that will continue after de-tariffication.

Some have therefore asked whether a 'smooth transition of the market from tariff to tariff-free regime' is not better achieved by, for example, obliging Insurers to offer the existing tariff covers alongside new de-tariffed wording for a period of time so the market could take its own time to gain confidence in the new covers. Alternatively, the MSW should comprise broad guidelines rather than actual wordings.

Whether the GIC objective of clarity of policy terms can be achieved is again debatable simply because the policy that is not susceptible to challenge has yet to be created. Dovetailing with this point is the fact that decades of case law and familiarity with tariffed products is to be replaced by brand new MSW. Again, the question is asked, why not mandate Insurers to offer tariff wordings alongside new covers for a transition period that may, perhaps, extend to a number of years? The existing tariff covers may not be perfect, but they are at least familiar to the insurance buying public, the Courts and to those who work within the insurance industry.
In essence, the differences of opinion that seem to be emerging are not about the GIC's stated objectives, but whether MSW is the right way of achieving those objectives. Even if it is the right way of achieving those objectives, issues arise as to the implementation of the MSW concept. For example, the time for considering the MSW is short and it is not entirely clear whether this is necessary. The insurance industry and those who work in it and for it, as well as the insurance buying public (which is not an homogenous mass), needs a proper period of consultation and debate so that end product is capable of standing the test of time as well as meeting the other GIC objectives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Neeraj Tuli
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