DEFINITION of Detariffing

A tariff in this context is a rate set or allowed by a regulatory body that determines what companies in a particular industry may charge their consumers. Detariffing then refers to the removal of such tariffs (as instructed by the relevant regulator) to allow for more market-based, competitive pricing. It is expected that increased competition from detariffing leads to lower prices and thus benefits consumers.

BREAKING DOWN Detariffing

Industry tariffs are usually either advised by or allowed by the regulatory body responsible for that industry. Detariffing occurs when companies are instructed to remove such tariffs, usually either because it is deemed that the industry can be self-sustaining without them and/or because the cost structure in the industry as a result of the tariffs has become prejudicial to consumers of its services. Tariffs may lead to pricing inefficiencies as well. Industries that have been subject to using such tariffs and then had to face detariffing include insurance companies in India and Malaysia, and certain telecommunications companies in the USA.

To use the example of Malaysia, Bank Negara Malaysia (the Malaysian central bank) had dictated car insurance tariffs based on factors related to the car being insured, but not the risk profile of the driver. This led to inefficiencies in premium pricing by car insurance companies as drivers of a similar car paid the same premiums even if their driving or theft risk profiles were vastly different. Detariffing led to insurance companies being able to risk-adjust premiums to better reflect insured risks.

The U.S. Federal Communications Commission (FCC) has mandated detariffing in sectors of the industry that it deems to be competitive. In one detariffing order, it detailed that though the traditional motivation behind tariffs in the telecommunications industry had been to prevent discrimination among consumers, the FCC had determined that detariffing would not cause anti-competitive practices. It also highlighted that the existence of tariffs had impeded carriers' ability to react to competition and may have actually harmed consumers. Detariffing was expected to foster competition in the sector.