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Shashwat Tandon



Insurance Industry - The Changing Paradigm….

Organised by
National Insurance Academy School of Management, Pune
on February 9 – 10, 2006

25, Balewadi, Baner Road, NIA PO,
Pune – 411045 (India)
Tel: +91 – 20 27204000, 27204444
Fax: +91 – 20 27204555, 27292396


Shashwat Tandon

The main focus of this research paper is to study the effects of Detariffing on insurance
companies. The paper gives an overview of the various issues which a insurance
company will come across in a post Detariffing scenario. The paper highlights the major
issues which could be raised in a post Detariffing scenario like how market and prices
will move, how products will shape up over a period of time, what are the chances of
mergers and acquisitions, how the role of regulator will be modified, what will be the
changes in the internal governance specially in the underwriting of the policies and risk
rating .
Finally Detariffing will be a smooth transition from tariff to non-tariff regime or not?


The Indian insurance industry is at cross roads. Booming economy, free flow of capital,
general euphoria regarding the success stories of the Indian companies globally have all
created a virtuous cycle where the country is looking at future more optimistically. This
optimism, translated into business and commercial initiatives will create more wealth to
the country. Insurance being directly connected with wealth is also likely to leapfrog
many times over. Even conservative estimates states that the potential premium is in the
region of about Rs 40,000 crores in the general insurance sector alone. The IRDA has put
non-life insurers on notice that the present tariff rating regime in fire, engineering and
motor businesses, constituting about 70% of the Rs 20,000 crore market , will be

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abolished from 1st January 2007. The Authority has directed them to put their internal
underwriting control systems and mechanisms in place for a smooth transition to a totally
free market that would function on negotiated pricing as the basis of insurance contracts.
Detariffing was a major reform recommended by the Malhotra Committee to liberalise
the Insurance Industry in its real sense, but till today the Industry and consumers are
waiting for it to happen completely.While the Insurance Industry was liberalized in the
year 2000 nothing much has really changed in the market for the consumers. The
consumer as of date has not benefited from the liberalization process to the extent he
should have been benefited. In fact consumers especially Corporates, are being subjected
to pressures and unhealthy practices from various vested quarters, which to a
considerable extent, will reduce, or get eliminated, once the market is detariffed
“completely” .Partial detariffing has resulted in unhealthy practices. Business is not only
canvassed but is also being purchased with incentives under the table. In addition, marine
and health covers are offered at throwaway prices along with profitable fire and
engineering portfolios. Further, good risks are subsidising the bad ones in tariff products.
The entry of private sector companies in the insurance space in the last five years has
been a catalyst in creating awareness and significant increase in the purchase of
insurance. Yet, despite this surge, the average Indian, however, continues to be well
under-insured (insurance penetration in India is only 3.2% as compared to 8% avg.
worldwide1). A more liberal market can only help to increase insurance penetration and
make the consumer more risk-conscious. Currently, the tariffs for policies are set by the
Tariff Advisory Committee, which does not give insurers the freedom to price policies
based on individual risk assessment. For instance, a car driver with a record of frequent
accidents should logically be charged a higher premium than another with a safe driving
record .But since the tariffs are currently the same, the good driver subsidies the bad
driver. The IRDA has downplayed fears that detariffing could trigger a premium war, and
is on record that it will ensure that insurers rate the risks they underwrite in a scientific
manner based on historical data. Thus we can look forward to various issues which
effects the insurance companies in case of post Detariffing scenario.

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The IRDA roadmap lays down clear deadlines to meet the requirements of detariffing,
and insurers are gearing up to face the free market in 2007. One peculiar feature of the
Indian insurance industry, inspite of the existence of the tariff for the past three decades,
is the absence of detailed industry statistics on premiums and claims which form the basis
of any rating system. Due to absence of a system of delivery of data from insurance
companies to a central authority such as the Tariff Advisory Committee, data has
remained confined to individual companies .It remains to be seen how these individual
companies. i.e. basically the government companies which have historical data, are best
able to utilise their respective data. If such data remains confined to dusty files in distant
branches, companies would have to start from scratch to build up pricing systems.
Information technology will prove indispensable in the systematic gathering, processing
and analysis of data. Companies will need to perform actuarial analysis on whatever data
is readily available and establish business line-specific and risk-specific rating
parameters. Particular attention has to be paid to the rating of long-tail business such as
liability, which being a relatively new though fast-growing segment, has little historical
development data to build on for rating purposes. Another critical area which needs to be
developed by the market is the assessment and rating of natural perils exposures. As per
Mrs UTTARA VAID “Prices will not fall drastically as insurance companies are not
going to get cheap reinsurance covers”. India is increasingly battered by what seems to be
a higher frequency and severity of natural disasters, and this coupled with increasing
value concentrations particularly in coastal and earthquake-prone areas, points to an
urgent need to revamp and update existing models for rating catastrophe exposures. The
appointed actuary, in association with senior experienced underwriters of the insurers,
will be responsible to list out the rating factor to be looked at every sub class of business
and every type of risk. He will also be responsible to draw up internal guide tariff and for
periodic review. Having identified the risk factor, the appointed actuary should ensure
that all required data on the rating factor is captured in respect every insurance
underwritten by the insurer and in respect of every claim .Insurance companies should
work with the IT department staff to design the system of collection and compilation and
analysis of data on premium and claims by several risk factors. Such analysis should lead

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to periodic review of the internal guide tariff and also serves as technical input to
nominated underwriters. The claim manager should be required to bring to the notice of
the underwriting staff, any information of importance to underwriting of risk. Similarly
reports produced by the loss prevention association of India should be studied by the
underwriting staff and their underwriting policy should take notice of relevant
information form such reports. In fact these reports helps the insurance company to
formulate there strategy to how to shape and place there products in the market.


At last the long awaited Government decision to set free the Non-Life Insurance Industry
from the chain and shackles of the Regulator’s Tariff has finally arrived. However, not
everyone connected to the Automobile Industry appears to be overjoyed. In general,
though, removal of the Tariff and giving the Insurance Industry the freedom to market the
“MOTOR” Insurance product as per individual underwriter’s perception has been
received very well. There won’t be any significant changes in the product only the
wording of the policy will change.
Though tariff market has its advantages; a few can be enumerated as follows:
• Disallows indulgence in unhealthy competition amongst the insurance Cos.
• Avoid price war. In the excitement of competition of business procurement,
pricing component is always the first victim. Tariff strictly disallows this.
• While the insured is protected against the risks insured (risks as stipulated by
Tariff only) the risk patterns, perils covered, conditions are all uniformly adopted
by all the Cos. and no reckless indulgence by the underwriters can take place.

• Highly regulated market conceptually makes it safer for the Insurance Cos. as
well as for the insuring public.
• However, in view of the uniformity in the rates and the product itself, customer is
not able to dominate the market forces.

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• Tariff is seen as a protective ring which in early days certainly helped the growth
of the Industry.
• In the initial days of the Non-Life Insurance in developing countries, disciplined
structure of the product and its marketing was essential.

In India, with 45% of its share and growing every day, motor Insurance Industry has
certainly matured enough and hence time is now overdue that it should come out of this
parental protected cocoon and grow exponentially with the fast growing Industry.
But when the IRDA detariffed marine hull this April, insurance premium rates in this
segment fell by as much as 50-60 per cent .The underwriting losses on motor claims
ranges between 100% for some companies and 130% for some others. The industry has
been clamoring for detariffing the motor insurance for long, but the powerful truck lobby
has been blocking the move. The IRDA is preparing general insurers on detariffing of
motor insurance which is to be implemented in the year 2006. The industry had been
demanding de-tariffing of the motor insurance since they felt that their products were
under priced. The IRDA has no intention to deregulating the third party premium because
of its statutory nature. But Detariffing of motor insurance has to be done for both owners’
damage and the third-party liability. It cannot be done in isolation. According to Bombay
Chambers of Commerce detariffing the own damage portion only could exacerbate the
problems faced by the insurer. According to them, the solution laid in detariffing the
entire class of motor business. Third party liability insurance business is a loss making
business. With over 3.5 lakh accidents resulting in over 85000 fatalities, the accident to
vehicle ratio in India is the highest in the world at 31.8 per cent. As third party was
deteriorating rapidly due to abysmally low tariff premium and increasing cost of claims a
committee headed by justice Rangarajan, constituted which decided to approach in the
following manner:

• Examination of the present rating system.

• Study of the prevalent pricing systems abroad.

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• Examination of the feasibility of the pricing methodologies used
abroad in the Indian context and introduction of appropriate criteria in

It can be forecasted that the chain effect will force the underwriters to structure the Risk
Management process to see that the profit margins are maintained by ensuring that their
profits are not eaten away by the external forces as is happening presently. Hence it is
expected that the Insurance Cos. as well as their customers will derive the full benefit. Be
it as it may, in the Free Market scenario, only those underwriters will emerge winners
who will devise specialized scientific control methods and ensure their enforcement as
corporate governance to eliminate the tremendous leakage which is currently taking
place. The cos. who are not profit conscious, will be seen fighting for their survival. As
in long run only few players will be there in market as market reaches its maturity.


The insurance industry deregulation may lead to an unprecedented wave of mergers and
acquisitions. Let’s look at the insurance sector after liberalisation. With private sector
players entering the insurance business and foreign insurance companies forming joint
ventures, public sector insurers are facing the heat of competition. With the setting up of
the Insurance Regulatory and Development Authority
(IRDA), there is a move to modernise Insurance Act. Propounders of liberalization want
PSU insurers to be converted to public limited companies, with the government holding
up to 50% stake.A large portion of the funds of insurance companies — 75% for Life
Insurance Corporation and 70% for General Insurance Corporation was pre-empted by
the government, thus putting pressure on their product flexibility. In the run-up to
liberalisation, the general insurance sector has been allowed to reduce this pre-emption to
45%. The next big step is removing price control, which insurers call detariffing.
Deregulation of the insurance industry in Europe during the 1990s was part of the
European Union’s attempt to create a single market for financial services. The insurance
industry deregulation led to an unprecedented wave of mergers and acquisitions, mostly

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as a fallout of price competition. From 1990-2002, there were 2,595 M&As involving
European insurers, of which 1,669 resulted in a change in control. Transactions occurred
in both cross-border and cross-industry, that is, involving insurers and banks and
within-industry. Japan and Korea responded differently to liberalisation to combat the
flipside of detariffing. A case study on Japan should be interesting by analysing three
anchor years — 1998, when the big bang of detariffing exploded; 2002, when the process
was completed; and 2003, when the effect was observed after the process was
streamlined. In non-life, intense price competition reduced premium per risk, hitting both
revenue and underwriting profit. In life, demographic shift and stagnation in the economy
influenced the consumer’s demand and affordability of protection, pushing down
amounts of both new and existing businesses of individual insurance. Insurers are taking
measures to improve operational efficiency. Non-life premiums have declined due to
liberalisation. In 2002, the reinsurance of Compulsory Automobile Liability Insurance
with the government was abolished, boosting its premium for insurers. Japan and Korea
have made their product portfolio flexible by simulating the top up capability of premium
making in life insurance. They have introduced a return component in the non-life
products. Part of the return is harnessed by the usual process of investment top up
on risk premium but a major part of the return comes from savings in the process of loss
prevention and of course aggregate market returns on all such accumulations convertible
to earning assets. Such non-life products are named as return linked insurance products or
RLIP. Detariffing cannot be a regulatory or political slogan. Other structural adjustments
are to be learnt by the players and monitored by the regulator.


The objectives of regulation and supervision of the insurance sector would primarily
consist of the protection of the interests of policyholders and enhancing the industry’s
role in supporting economic growth and the stability of the financial system. In the
context of a predominantly tariffed market keeping in mind the core objectives as stated,
the regulator would need to examine whether moving from tariff to non-tariff rates and
terms are in customer interest, and whether the players in the market are able to roll over

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from one to the other in a smooth and effective manner. Detariffed markets can address
issues in innovation, flexibility and tailoring that make insurance more relevant, effective
and capable of meeting customer expectations. The regulatory approaches look to
ascertaining that necessary steps are taken to maintain the safety and soundness of
operations. The new policies and practices adopted for a non-tariff environment must see
that the potential turbulence and volatility that may arise from the roll over, is smoothed.
It has to ensure that the necessary prudential requirements are set and implemented. The
transition to non-tariff competitiveness should not disturb the tenor of orderly conduct of
business by strict monitoring and rigorous enforcement of prudential norms by all
concerned. The other aspect of regulatory intervention is in managing the consumer
anxiety that may arise from the switch to risk based underwriting. This anxiety may arise
from perceptions that insurers may reject proposals on some pretext or other, or due to the
fact that consumers may find a bewildering variety of offerings with the widely differing
premium rates and terms from competing insurers, and that as insurers move away from
standard products, when it comes to claims, insurers may not pay claims fairly.


With the abolition of tariffs, the role of TAC will undergo a change .It can perform
following useful functions:

1) Collection of data on premium and claims, analysis of such data and

dissemination of the result of the insurers.
2) Report to IRDA on the underwriting health of the market and any aberrations in
market behaviours.
3) Constitution of expert groups at the request of general insurance councilor look
into underwriting issues and recommend necessary actions.
4) Organise training to underwriters at the market level.
5) Attend to public grievance on – availability of insurance and try to resolve the
issue by discussion with insurers.

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Pricing Freedom Tariff in operation

• China
• India
• Hong Kong
• Malaysia
• Indonesia
• The Philippines
• Japan - except for
• South Korea - tariffs
compulsory auto liability
apply to risk premiums
insurance and housing
earthquake risk
• Taiwan - only for

• Singapore compulsory lines

• Thailand
• Vietnam

As the role of regulator changes to a more restricted one, at the company level corporate
governance becomes the most important component determining that the insurer has the
necessary strategy and the top management will to ensure a smooth shift to a non-tariff


A company’s risk management system needs to be built on important strategic pillars as
may be determined by the Board. Risk capital, risk tolerance and appetite, target rates of
return etc. are all part of such decisions. These are to be determined by the Board.
Standards are to be set by the Board in line with the expectations of the owners, capital
markets and the Regulatory Authority. Good corporate governance will determine all

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underwriting directions keeping in mind the best industry practices, ethical customer
service parameters that offer necessary guidance against unfair practices, set benchmarks
on disclosures and transparency, lay down prudent rating standards, and norms for risk
acceptance and limits of authority at various levels.

Corporate governance standards set by the Board will include all aspects of internal
control systems that will ensure proper discipline in underwriting and set directions on
issues such as:
• separation of critical functions
• comprehensive risk management policy
• methodology of provisioning
• policies and procedures regarding accounting matters
• setting up independent risk management functions relating to the type of
business underwritten.
• policies regarding conflict of interest
• fair treatment to clients
• inspection of risks and risk analysis
• IT policy, data collection and analysis
• rating procedures in consultation with the Actuary
• New product development and approval etc.

Every report of the CEO to the board of director on the business development
must also comment on the emerging claim experience of the business and
adequacy of the current underwriting and rating levels, such reporting should be
done atleast once every half year .Each insurer should have compliance officer
who will ensure that system function as it is expected to. In case of Detariffing
moving from rule based underwriting systems and practices to a risk based
decision making of the subject matter offered for underwriting by the customers.

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The function of underwriting and rating of insurance business should be independent of

business development function. For operating convenience every insurer requires to have
internal guide tariff for the smaller valued and simple risk. Staff will be trained to guide
them to underwrite and rate risk as per guide tariff. Risk not covered buy guide tariff
must be referred to nominated underwriter stated at higher office of the insurer. These
underwriters will be specially trained in evaluating risk, securing write inspection report
or risk evaluation report and underwriting and rating of the risk and determining the
terms and condition of the cover. The nominated underwriter with the authority to accept
or decline risk and to quote rates and terms will not report to any officer with business
development responsibilities but will report to only senior level officer whose work and
performance will be assessed on the basis of the results of underwriting. There will be a
core team of well qualified underwriters who will do the internal audit of the
underwriting efficiency of the nominated underwriters. Where a nominated underwriter is
found wanting in skills he will be further trained. Where he is found careless or lacking
diligence, his authority will be withdrawn. The insurers will have a risk inspection team
within the organisation or may use the services of the outside experts for risk evaluation.
These persons will be totally independent of business development staff and will report to
the head of the underwriting function. Therefore insurance underwriting is not to be seen
as one tied to static and rigid rules, or to be seen as avoidance or as a backward looking
reactive response. Good underwriting has to be freed to enable it to seize the
opportunities thrown up by the economy, so that the risks in the economy are readily
addressed for reduction and protection, the revenues of the insurer are thereby enhanced,
in a way that leads to capital enrichment and expected or superior returns to shareholders.
As per Mrs UTTARA VAID “in detariff scenario major focus will be on underwriting”
Risk based underwriting would naturally need a more effective supervision. Such
supervision looks at how well the management of the insurer identifies, measures,
controls and monitors risks. It tries to ensure that a frame work is embedded within the
organisation that establishes an approach to evaluate the management of risks. The
approach to ensuring a steadfast and professional risk based underwriting regime would

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ideally have three components which consists of: a) risk based supervision by the
Regulator, b) standard setting by the industry, and c) self-regulation by the concerned
insurer. As per Mr. SWARAJ KRISHNAN “wrong underwriting could lead to solvency


Risk Factor Rating System (RFRS), where by vehicles are grouped on a scale of 1 to 20
with group 1 being the lowest rated vehicles and group 20 being the highest. Under RFRS
the premium rate is calculated on the actual claims experience of the insurer or the
industry. It is a statistically based rating system where each policy holder pays a premium
rate that is based on relevant risk factors .The advantages of RFRS is that it can provide a
more statistically based pricing as compared to sum insured based rating system in the
Indian market .


Presently, PML helps us in quickly knowing - whether the risk is good or bad.

For example, the simple thumb rules can be: -

High PML = Congested layout and vice a versa.

Also High PML = Bad Risk and vice versa and so on...

Further, from Reinsurance point of view; a similar simple thumb-rule can be: -

Low PML = High Retention and vice a versa.

Where PML can be critical would be the `catastrophic losses'. Due to global
environmental and geological changes, we are going to face more and more catastrophic
losses in the near future. The recent damage scenarios are clearly confirming to this trend.

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PMLs for Cat Losses are therefore going to play a crucial role in the forthcoming years.
Further, the accumulations will be a key in the future Cat Losses. The accurate judgment
of accumulations based on PMLs and organising economical Cat XL treaties accordingly
will be the key .As we know, PML concept need not be restricted to property business. It
can cover a very broad span of Property, Marine, Personal, Commercial and
Miscellaneous classes of general insurance businesses. Since, all the classes of businesses
[except motor] are going to be detariffed, PML will become all the more critical because
of its wider use after 1st January 2007.The principle changes, which can take place in the
operational aspects of Insurance Business, can be visualised as under:-
Currently, all the tariffed businesses have fixed minimum rates and pre-defined scales of
deductibles.This forms the base of underwriting and R/I equations. In the detariffed
regime, this base itself will become very shaky. In fact, the first two years will be highly
turbulent. Here, PML will provide a highly effective tool for imparting a great degree of
stability to the shaky ship of insurance business. PML can help in fine-tuning of the
technical rates - which will be arrived at based on physical risk features. This is because
PML can be a great indicator of the overall risk exposure. PML can facilitate the insurer,
insured and the reinsurer to jointly decide regarding opting for the voluntary deductibles,
their quantum and the related cost benefit analysis. Currently, many classes of the
businesses are reinsured either on PML or sum insured basis. In the detariffed regime,
this practice will need a review and PML will play a vital role here too. The acquisition
cost of the business will be another important factor in the detariffed market. PML can
give an edge to the economics of the acquisition cost and thereby to the profitability of
insurance business.


Administered prices in a liberalised market? Though it may sounds like an oxymoron ,

that is what is in existence in the domestic non-life insurance sector. In insurance
parlance, administered prices are called tariff rates and free rates are called non-tariff
rates. At the operational level, the branch and the divisional office heads are given
business targets apart from being in-charge of administration. Today the promotion of

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branch and divisional managers is based on the premium procured and not on the
bottomline. Figures below shows some of the changes in the loss ratio, expense ratio and
net profit which took place in japans insurance market post Detariffing :-

YEARS- FY 2003 FY 2002 FY 1998

LOSS RATIO 55.3% 54.7% 57.4%

OPERATING 33.2% 34.5% 39.4%

NET 325.8 79.9 116.1

Source: General insurance association of Japan

Deregulation fallout
From 1990-2002, there were 2,595 M&As involving European insurers, of which 1,669
resulted in a change in control.
In Japan, intense price competition reduced premium per risk, hitting both revenue and
underwriting profit in non-life sector.

According to an industry source, once the rates are freed, all eyes will be on industry
leader New India Assurance Company. "It is the leader who decides the rates and others
just follow, perhaps, with slight variations." It will be a catch 22 situation for the
government insurers as they will see premium going down while being laden with the
loss making motor portfolio where the rates are inelastic. Private insurers refuse accept
commercial vehicles. Curiously IRDA remains silent to this practice .Detariffing is
essentially an acknowledgement of business realities and an attempt to differentiate the
risk exposure. Keeping one sector of insurance which comprises over 40 per cent of the
market under tariff fundamentally goes against the concept of detariffing. Obviously, the
IRDA is concerned with the possibility that detariffing may result in non availability of

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insurance to what is technically known as uninsurable risks but I think the industry is
working jointly with IRDA to resolve this.

• Detariffing of own damage insurance would increase the own damage rates which a
truck owner would not be able to afford.
• The harassment of policy holder would increase further after detariffing as there can
be instances of loading of premium even on brand new vehicles
• As feared by road transport industry de-tariffing could lead to an increase in motor
insurance premium and thus an increase in their working costs. In such a situation,
they fear that the increased costs might have to be passed on to the consumers, which
could make road transport costlier than rail freight movement.
• Insurance agents /surveyors/ brokers/TPA’s/investigators and other related
intermediaries at times may mislead customers.
• Members of the same pool/group/ risk category with standard coverage will be treated
differently by different insurers.
• In case there is detariffing there will be a blood bath. Typically deregulation leads to
a fall in rates as players cut rates to attract business, lose money and raise rates again.
This leads to a boom and bust cycle.
• Some members felt that detariffing of the motor business would result in a reduction
in insurance premium making the business further unviable. They point out that as
marine insurance business was detariffed, premium rates had crashed and at present
much of the business is offered at a very low price.


Complete detariffing will not only transform the industry from a regulated to a
competitive environment, it will enable better allocation of resources, resulting in wealth
creation for the individual, the community and the country. Consumers will get an
opportunity to select a good product at a competitive price and will have a choice from a
wide range of customised products. Detariffing is also expected to bring substantial

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market expansion and focused penetration, together with technology upgradation, fine-
tuned to international standards. New and innovative products would make their presence
felt, along with improved focus on customers and better service on global standards.

With the likelihood of detariffing of general insurance policies it is important for

insurance companies to start analyzing information from now on. The two most important
business portfolios that fall under administered pricing are fire and motor. While fire
portfolio brings in profits for the insurers, motor insurance is a loss making proposition.
Therefore IRDA is still in dilemma whether to detariff motor insurance business or not.
Most of the players have reached critical mass and can survive in a detariffed scenario.
Early detariffing will now take the industry to the next level of maturity. Tariff and
liberalisation are antithesis of each other. We cannot continue to remain under a tariff
regime for long. We will have to come out of the tariff, as quickly as possible, to ensure
that we do not lag behind internationally and the industry is accepted and respected

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- JUNE 2003

- JULY 2004




• ARTICLE BY Venkatachari Jagannathan

15 November 2005

• INTERVEIW of Shrirang V Samant, CEO, HDFC Chubb General Insurance

Company Limited published on 22nd November 2005

• IRDA road map for detariffing given to all CEO’s by C.S.RAO

• Views Taken From :






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Author’s profile:
Shashwat Tandon did BA(Hons) in ECONOMICS from Hindu College
,DELHI UNIVERSITY .He is currently pursing M.B.A from National
Insurance Academy, Pune.

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