Insurance companies are allowed to offer discounts for auto insurance only up to 2.5%, according to a law called into action by President Hassan Rouhani on Wednesday. The proclamation puts an end to a practice common among major insurers, especially the sate-owned giant Iran Insurance Company, selling Personal Auto Policies at prices 25% – 35% cheaper than those set by the Supreme Council of Insurance. The law was passed by the Majlis as an amendment to ‘Vehicle Insurance Law’ in March.
As per law, insurance companies can offer discounts based on buyers’ driving history – or Motor Vehicle Report–as well as the vehicle’s general condition. However, insurers may offer discounts of more than 2.5% if they have approval from the Central Insurance company of Iran–the industry’s regulator. They are also permitted to charge policyholders up to 2.5% more, if extra services are included in PAP policy. CII could grant such permissions based on insurers’ capital levels and the general condition of the market, Iranian Insurers Syndicate website reported on Thursday.
Underselling PAPs, which in Iran provides coverage for damage or injury to third parties, had recently disrupted the insurance market prompting objections by smaller firms that could not keep up with the competition. Iran Insurance Company, in particular, was criticized for offering substantial discounts, sometimes up to 35%, without even considering the policyholders’ MVRs.
PAP is the mainstay of Iran’s insurance industry that still remains underdeveloped. According to CII, PAPs accounted for 37.6% of insurance firms’ total premiums during the previous fiscal year that ended in March with insurers selling some 19.18 million PAPs in the period.
While on the surface it may seem that PAPs should be to the benefit of insurance companies, however, official data show that insurance companies are suffering considerable losses because of the PAPs. This category alone accounted for 43.9% of total claims paid by the insurers during the previous fiscal year. Needless to say, one primary reason for PAP power is the fact that in Iran it is mandatory.
Aims
The government has urged the regulator to define a new code for the Iran Insurance Company, the sole remaining state-owned player. “IIC should play a complementary role in the market with a focus on innovation,” Economy Minister Ali Tayyebnia said recently.
Iran Insurance Company accounted for 39.47% of the premiums while the remaining was shared between 30 private firms during last year. The company also accounted for 44% of the paid claims. Asia Insurance and Alborz Insurance trail by a big margin behind IIC, holding 10.15% and 7.56% of the market share, respectively.
With enough government backing, a nation-wide network of agents, and enjoying public trust, the IIC seems to be the best candidate for promoting innovative services in the industry. CII’s website shows that the IIC accounts for almost one-fourth of innovative insurance policies during the last decade. Comprehensive insurance for drivers in Iraqi Kurdistan, comprehensive insurance for rural residents, insuring foreign tourists visiting the country, and compensation for blood transfusion victims shows that the insurer has the tools for assessing risks and measuring losses.
With PAPs here to stay, policymakers are now trying to lift the share of life insurance category in the insurers’ portfolio, which could be the next big step for the industry. A recent publication of the Iran Insurers Syndicate indicates bank-affiliated insurance firms have managed to increase the sale of life policies. The Iran Moein Insurance firm, a subsidiary of IIC operating in the free trade zones, boasts the largest share of life insurance in its portfolio, at 60% and more than any other company.
The numbers reaffirm the importance of gaining public trust for promoting the life insurance category as is the trend in most countries. What also is worthy of mention is that insurance companies seem to be latecomers to the process of effective reforms, especially in planning and asset management. This must change if they want a larger share of the gradually growing market and the likelihood of foreign completion in the not too distant future.
