Declined risk pool could be on its way out

The size of the declined risk pool has shrunk from Rs 5,000 cr when the TP motor pool was there to about Rs 350-400 cr

General insurance companies have asked the Insurance Regulatory and Development Authority (Irda) to dismantle the “declined risk pool” in third-party (TP) insurance of commercial vehicles.

Irda dismantled the TP motor pool in December 2011 and decided to form a declined pool, effective April 1, 2012. The move let insurers price vehicles based on claims.

Under the declined pool, an insurer have the right to refuse or decline a third-party insurance if it finds it too risky an asset to underwrite. This declined vehicle would then be covered by another insurer. For the remaining vehicles, insurers would be free to underwrite risks independently. To avoid “cherry-picking”, insurers were allowed to decline risks only on certain parameters, such as claims and vehicle’s age & type with some others decided by the regulator. The General Insurance Council has sent a proposal to remove the declined risk pool. Insurers expect it to be done away with in 24-36 months.

“The size of the declined risk pool has shrunk from Rs 5,000 crore when the TP motor pool was there to about Rs 350-400 crore, because most business was underwritten into individual company books. Hence, the slow dismantlement of the pool is the next logical step,” said a private general insurer’s chief.

However, the losses in the motor segment continue to persist because of the third party segment, where pricing is regulated. Even 20 months after third party (TP) pool for commercial vehicles was dismantled and declined risk pool was set-up, the woes of general insurers are far from over. Combined ratios for the motor insurance segment, have stood between 140-145% for the industry.

“Earlier, there was a situation of insurers selectively insuring commercial vehicles in the TP space. Now, most of the business is retained in their books and only a small proportion comes into the pool. Therefore, the significance of the pool has reduced and there are fewer cases of clients not getting TP insurance,” said a senior general insurance company official.

Inadequate price hikes in motor TP segment and incomplete coverage of TP insurance for vehicle owing population in India, where TP cover is mandatory, is behind the losses remaining high. Insurers said that claims ratio is significantly higher meaning that companies paid 60-100% higher claims than the amount of premium earned.

Some insurers are also of the opinion that while this pool would be removed, Irda may not be immediately in favour of it. A senior official from a public general insurance company said that Irda's earlier chairman too was in favour of letting the pool continue for some more time before it slowly becomes insignificant.