General insurers told to have a common underwriting manual

Finance ministry directs not to pay brokerage or commissions for vehicles more than 10 years old

In a move to contain the losses inherent in the third-party motor insurance portfolios, the finance ministry has asked the four state-owned general insurers to prepare a common underwriting manual for declined risk pool by the end of August for the next financial year.

The move is aimed at ensuring that the risk avoided by one public sector undertaking (PSU) does not get transferred to another PSU insurer. Besides, this would also ensure all the four insurers follow a uniform underwriting practice.

Four state-owned non-life insurers — National Insurance Co, Oriental Insurance Co, New India Assurance and United India Insurance — account for more than 55 per cent of the ~58,000 crore general insurance market in India.

The ministry has also directed no brokerage or commissions would be payable for vehicles more than 10 years old. “In case of vehicles more than seven years of age, commissions or brokerage shall be restricted to five per cent of the own-damage (OD) premium. No commissions or brokerage shall be payable for vehicles of more than 10 years of age,” the ministry said in a recent communication to the PSU general insurers.

“The ministry is discouraging us from insuring older vehicles as the claim ratios for these vehicles are high. Private players are already avoiding insuring vehicles which are more than five years old. As such, all these risks would go to the (declined) pool,” said a senior official at a state-owned general insurance company.

Motor portfolio, which constitutes around 43 per cent of the total premiums, has always been the “Achilles heel” for the general insurance companies in India due to inherent losses on account of commercial third party losses. The claims ratio is estimated at 153 per cent, which means for every ~100 premium collected, the claims paid is ~153. Besides, the premiums for the commercial third party is rated.

The latest diktat of the ministry is aimed at bringing down the loss ratios in motor portfolio in these companies to below 100 per cent and make it profitable.

Total premiums collected by the general insurance companies stood at around ~58,300 crore during 2011-12, of which motor premiums constituted ~24,000 crore. Typically, third party liability accounts for 35 per cent of the total motor premiums. The industry took a hit of ~8,000 crore last year on account of commercial third party motor pool losses.

In a bid to distribute the losses among the insurers,Indian Motor Third Party Insurance Pool (IMTPIP) was created in April 2007, for commercial vehicle third-party insurance business. The share of each insurer was decided according to their overall market share of all lines of business.

However, due to mounting losses, last December, the Insurance Regulatory and Development Authority decided to do away with the existing commercial third party motor pool and said the pool would be dismantled on a clean-cut basis, where the losses from 2007-08 to 2011-12 would be shared in accordance with the new loss ratios according to the regulator, in the region of 153-213 per cent.