the art of Underwriting and need for controls on Insurers

There are many Insurance Companies offering products at varied terms, conditions and differential rating pattern.  Protecting the interests of policy holders and treating them fairly are the need of hour.  At the same time, in a soft market, the orderly growth of Insurance industry benefitting the insurance public also requires acceleration.

With the opening of Insurance Sector to Private players there has been some significant changes.  In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry.

A decade after opening up, the situation is still fluid and detariffing has caused more chaos.  The rates are rock-bottom with the concept of  better risk attracting a lower rate has vanished in to thin air in an era where undercutting is the buzz of underwriting.  

I am not for a second advocating that rates should only go up – but just think of this. When we studied there were note books – we still have them.  They were mostly unbranded – they still sell; in between have entered some players who sell branded ones, at a much higher cost.  They claim that their product is technically superior and price them higher than the market products.  Theoretically, only the lowly priced ones should rule the roost – you will be surprised to find that now a days, stationers stock more of branded ones and they sell well !!

The lowering of rates or the rate reduction cycle should happen after sound technical analysis of the risk considering the exposure change, inflationary trends, spread in the market, penetration, revised frequency, severity trends,  and more.   Such a technical expertise will take us to the debate on “the art of underwriting”.  While Underwriting would be an art, the Underwriter is not an artist as  Artists have total freedom to execute and design their works which an Underwriter will not have.  Anyway, it is not the capability of the person but the factual risk assessment which is more material.  

With the coming into being of Insurance Regulatory and Development Authority – there has been talks of stifling of the acts of Insurers, Agents, Brokers, Surveyors and others active in the insurance domain.  Even recently a PSU Insurer was warned for violating the ‘file and use’ guidelines – i.e., not charging the premium as per the product / premium filed by that Company with that Authority.  IRDA directed the Insurer to refund the excess premium.

Though there is a feeling of general constraint, the creation of authority was for a much larger purpose.  In a recent instance in our neighbouring country, as quoted in a Nepalese newspaper, an Insurance Company has been found embezzling over Rs 58 million belonging to its clients, in an instance of unethical behavior by a firm that was granted operating license by the government to guard funds collected from the public.

The non-life insurance company, which generates revenue by selling motor, fire, marine insurance policies, among others, said the fund was used to pay rental installment for a building which it had hired for 15 years.   It is stated that this never happened and the money probably went in to the pockets of promoters.  The case of misappropriation of public funds came to light during an on-site inspection conducted by the Board, the insurance sector regulator. Soon after the case was unearthed, the Board warned the company to immediately return all the money. So far, almost half of the sum of around Rs 26 million has been retrieved. The IB has now given the company a deadline of May 4 to return the rest of the money with 16 percent interest.  The Regulator did not take action against the Company but decided to give an opportunity for correction.   There is further news that since the beginning of 2012, at least three insurance companies have faced the regulator´s axe.

With regards – S. Sampathkumar.