A working group of insurance regulator IRDAI, that revisited the structure of products providing cover to homes, offices, commercial establishments and MSMEs, has recommended many changes, from simplification of the policy wordings and provision of adequate cover to insuring homes in multi-storeyed apartments for total saleable price.
Seeking comments on the group’s report, the Insurance Regulatory and Development Authority of India (IRDAI) said wordings and terms and conditions of the basic policy for fire and allied perils for all categories of risks are driven by the erstwhile All India Fire Tariff, 2001. Insurers, however, have been permitted to sell add-ons to the basic cover. IRDAI had set up the group in view of the huge gap between economic losses and insured losses, post catastrophic events, for homes, offices, commercial establishments and MSMEs. The group submitted its second and last part of the report in November.
Structure remains same
Noting that the protection needs of the insuring public for their assets against fire and allied risks are met by Standard Fire and Special Perils Policy (SFSP), the group said the product structure remained, more or less, the same since the All India Fire Tariff revision in 1988. “Though the tariff has undergone several changes since then, the last in 2001, these changes were more in the rules of underwriting and premium rates rather than in the basic structure, coverage and terms of insurance or the claims settlement processes.”
Noting the product, created years ago, does not seem to be meeting the true protection needs of the insuring public, the group recommended introduction of three different versions of the product as a measure to address the present practice of same product being sold to large commercial customers as well as homes and small shops.
The first, and the simplest of the three with most relaxed terms, would be for homeowners while a slightly more refined version would be for micro commercial establishments having value at risk of up to ₹5 crore. A moderated version of the existing product is recommended for commercial risks having value at risk from ₹5 crore to ₹50 crore.
The group also recommended coverage of all perils in the base product itself to “avoid mis-selling and inadequate coverage for unsuspecting public. Now, many perils do not form part of the base product and are sold as add-on/riders on customer demand or sales push. “For example, earthquake, which has caused large scale economic losses in different parts of the country in recent past, is not a default cover in fire insurance but has to be opted by express demand,” the report said.
The group said there has to be a system of default sum insured for all the dwellings such that the insured value is a reasonable estimation of the correct value of construction cost of the building. Towards this, it wanted the General Insurance Council or the IIB (Insurance Information Bureau) to create a database of cost of construction for each square feet of carpet area for different geographies and construction types. The insured would declare only the carpet area and the sum insured of the dwelling shall be auto-calculated at the given rate. Likewise, insurance of apartments in multistoryed building should be for total saleable price of the unit based on rates published by the State government concerned. Policyholder will have the option to increase this rate if the actual rate is higher than ready reckoner, but not reduce below it. “In case of a total loss, per square foot rate specified in the policy shall be sacrosanct and claim shall be paid after multiplying it with the actual area of the apartment,” the report said.