Burning cost model used for pricing scrapped by India's insurance regulator

The burning cost rate is arrived at by dividing claims paid by sum insured.

IANSUpdated: Wednesday, December 21, 2022, 10:15 PM IST
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Hours after the Insurance Regulatory and Development Authority of India (IRDAI) announced scrapping of the 'burning cost' model of pricing by reinsurers, investors in General Insurance Corporation of India Ltd (GIC Re) saw their pockets burnt on Thursday.

The share prices of national reinsurer GIC Re which was on the upswing for the past several days opened at Rs 188.45, touched a high of Rs 190.45 and came down to Rs 176.45 on the BSE.

The GIC Re scrip was changing hands for Rs 177.10 intra day on Thursday.

Earlier on Wednesday, the IRDAI advised all non-life insurers and reinsurers to ensure that the Insurance Information Bureau (IIB) published premium rates for fire and engineering policies are not embedded as the minimum rates within the reinsurance treaty agreements for the risks commencing on and after 1st April 2023.

In May this year, IRDAI had clarified that it has not mandated any minimum premium rates for fire insurance risks under the heading 'burning cost'.

It said policyholders are being led to believe that the Burning Cost released by IIB is 'minimum mandated rate'.

The industry burning cost is only a reference point to understand claims experience in fire perils across the insurance industry, the IRDAI had then said.

So, what is this burning cost?

Simply put, the burning cost rate is arrived at by dividing claims paid by sum insured.

In 2020, the GIC Re, decided to accept reinsurance placement only if their clients belonging to certain industries are charged a premium rate on burning cost basis as arrived by IIB.

The insurance regulator too had then advised the insurers a) either adopt 'burning cost rate' published by IIB; b) adopt their own internal burning costs if any; or c) in case of deviations from both, report to their board of such exceptions and periodically inform board reactions to the regulator.

The GIC's move in effect has forced the primary insurers to increase their rates several fold. This augured well for the primary insurers and the reinsurers.

Fire insurance premium rate crashed soon after the insurance regulator abolished the administered pricing mechanism.

In September 2021, the IRDAI issued a draft Insurance Regulatory and Development Authority of India (Insurance Information Bureau of India) Regulations 2021.

As per the draft regulations, one of the objectives of IIB is to generate benchmark rates for different lines of insurance business, including life, motor, health, marine, fire and others on a periodic basis for promoting reasonableness and sustainability of premiums in the insurance business.

The draft regulation mandates life/non-life/reinsurers and other entities regulated by IRDAI to share the data in required format with IIB so that it can come out with the benchmark rates.

According to the IRDAI, the draft regulations were made in consultation with the Insurance Advisory Committee (IAC), whose members are majorly from the insurance industry.

The IIB is a society registered in Andhra Pradesh.

On Tuesday, the IRDAI said it acknowledges that every reinsurer should have the freedom to price its reinsurance product and freely negotiate terms of trade with its counterparties i.e. 'Cedants' (primary insurers).

However, terms of trade shall not be an impediment on the freedom of the 'Cedant' (Insurer) to freely compete, negotiate, price and assume risks via its own contracts of insurance with its clients i.e. 'insurance buyers', IRDAI said.

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