Insurance discounts may soon be thing of the past: Here’s why

Subhash Khuntia of the Insurance Regulatory and Development Authority of India (IRDAI) has told insurers that the regulator will not permit any unviable discounts to be doled out to the clients. Khuntia said that sectors like telecom and aviation had faced a downfall due to heavy discounts being offered to customers.

Going a step further, insurance companies have been warned that if they continue to engage in discounting practices, penalties will be imposed from the regulatory body.

Discounting is a practice in the Indian insurance sector where corporate clients are offered lower premiums at the time of renewals even when past claims have been high.

For example, if a manufacturing firm has come in to renew their insurance product and has faced heavy claims in the previous year, an ideal underwriter would charge a higher premium for renewal. However, Indian insurers end up charging lower in order to retain the client on their books. This impacts the insurer’s books.

Loss ratios go up consistently due to the discounting practices, touching 130 percent in segments like fire insurance. This means that for every Rs 100 collected as premium, Rs 130 is paid as insurance claim.

IRDAI has, in the past, asked insurers to strictly follow the burning cost methodology. This means that an insurer should charge premiums based on past claims history and not offer unreasonable discounts. However, insurers were not following this mandate.

Only after a nudge from the General Insurance Corporation of India (GIC Re), insurers were forced to raise rates in fire insurance to match the claims ratio. Since GIC Re offers reinsurance risk covers to insurers, the latter was forced to hike rates to ensure that their books are protected.

(Source: Moneycontrol.com)