Pay-as-you-go policies show a mature insurance market

New Delhi: In many countries, the cost of insurance for owner-drivers of red-colored cars, especially the high-speed variety, is usually higher because it is a gift for a risk-taking personality. The record number of fines for speeding and other violations of traffic rules further help to form the profile for the assessment of insurance costs. The point is that a safe owner-driver should actually pay less for insurance than habitual offenders, less safe drivers.

India’s financial regulators have long been criticized for their conservative approach — be it approving new products or processes. But it looks like they are phasing out this tag. And this is reflected in the latest move by the insurance regulator – Irdai, which allows insurance companies to offer sophisticated technology and add-on policies or cover. Consumers will now have a choice of policies such as pay-as-you-drive – which will be based on kilometers traveled per year and possibly pre-declared and tracked through technology, and pay-as-you-drive – again based on technology to monitor driving and violations in addition to the floating car policy, for to provide coverage to an individual with multiple vehicles, including two-wheelers and four-wheelers. Much of it targets Indian millennials who are comfortable with digital products and payments. It offers more options for policyholders while opening up the local insurance market to technology-driven coverage. What is encouraging is not only the introduction of these concepts, but also the insurance regulator’s decision last month to allow insurance companies to launch products without its prior approval. This may also be related to the maturation of the industry, which was opened to private firms two decades ago, and the rapid digitization.

The launch of these new products is unlikely to move the needle on non-life insurance penetration in India, with the share of life insurance much higher at over 75%. The claims ratio for the auto segment may have declined to 75.6% in FY21 compared to a year earlier, but insurance losses in the industry are still high at just over 20,000 crore in the same fiscal year. Furthermore, it would be overly optimistic to expect significant changes in driver or driving behavior even with technology-based tracking applications in an environment where rule-based behavior is not the norm. And with limited incentives to change that. But that shouldn’t deter the regulator or insurers.

In the 1990s, the transformation of banks and encouraged competition had a lot to do with the entry of private banks and the introduction of technology. Over time and in the next phase, the challenge to banks came first from mobile banking players and later from payments banks and technology-based fintech firms. This helped to expand credit, reach new customers and lower transaction costs.

The RBI also moved this year to promote a new company with an independent board to promote financial innovation. The RBI Innovation Hub aims to create an ecosystem that focuses on promoting access to financial services and products for the country’s low-income population and bringing world-class innovation to India’s financial sector, it said.

While doing all this, both Irdai and RBI should be much more careful about consumer protection. The insurance regulator has given much more freedom to insurers, but will insurers invest the time and effort to ensure that customers of the new complex products are fully understood by them. Insurers have a much greater responsibility in this regard and to ensure that the digitally enabled insurance segment begins to evolve.

The principle of caveat emptor applies but a prudent regulator should also ensure, especially in an under-penetrated market like India, adequate protection and redress mechanisms. This would require a much more effective ombudsman at work in this sector as well. An integrated ombudsman scheme has now been introduced in banking to resolve customer complaints across the sector.

All these challenges hardly seem formidable in a country where the transport minister says he is now considering legislation to curb the practice of vehicles parked wrongly on streets. This follows the amendment of existing rules to increase penalties for offences. Without accompanying behavioral changes, outcomes for both insurers and those signing up for these complex auto insurance products may not be optimal.

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