Motor third party insurance still remains a stress area on insurers' books

Insurers say claims ratio is significantly so companies have to pay 60-100% higher claims than the premium

Even one and a half years 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.

A ratio below 100% indicates that an insurer is making profits.
 
Inadequate price hikes in motor TP segment and incomplete coverage of TP insurance for vehicle owing population in India, where TP cover is mandatory, has led to these 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.

"While there was some initial reduction in losses in TP segment, it is not up to the level that we desire. Inadequate pricing of the product and uninsured vehicles plying on the roads are to blame for this situation," said the motor insurance head of a private general insurance firm.

In December 2011, Insurance Regulatory and Development Authority (Irda) dismantled the commercial third-party motor pool. The regulator has now decided to form a 'declined' pool, effective April 1, 2012. The move had assumed importance, as it freed the pricing model and gave insurers rights to price vehicles based on claims.

Under the declined pool, insurers have the right to refuse or decline third-party insurance if it finds it too risky an asset to underwrite. This declined vehicle would then be given a cover by another insurer. However, the risk would be ceded or transferred to the declined pool. For the remaining vehicles, insurers would be free to underwrite risks independently. This means a deferential pricing system, based on claims, age, and frequency of accidents, would evolve.

To avoid 'cherry picking', insurers are now allowed to decline risks only on the basis of certain parameters like claims, the age of the vehicle, the type of the vehicle, geography, along with other parameters to be decided by the regulator from time to time.

Further, Irda raised premium rates for third-party motor insurance policies by up to 20% for 2012-13. While the third-party premium for personal cars and two-wheelers rose by 5%, those of commercial vehicles rose by 15-20%.

Later, from April 1, 2013, Irda had announced a proposal to increase motor TP premiums rates, by an average of 35% for vehicles including private cars and commercial vehicles from April 1, 2013. However, general insurers are of the view that hike in premium rates of motor third party premiums has not been adequate.

G Srinivasan, CMD of New India Assurance had said, "In segments like commercial vehicles, we need a 60 to 70% rise to make it a viable business. Hence, the motor TP premium increase suggested by Irda is not adequate."

The move to raise the premium was in line with the regulator's directive that the third-party motor premiums will be revised annually using a formula based on inflation and claim experience. Motor TP segment is still regulated by Irda and hence pricing is decided by the regulator. The industry has been demanding that pricing for this segment should be freed.

Also, under the present Motor Vehicles Act, there is no ceiling of the compensation/claim that can be awarded in third party insurance. Hence, companies have to pay whatever is decided by the courts. An amendment to the Motor Vehicles Act, which seeks a cap of Rs 10 lakh on the compensation that can be awarded, is still to be presented in the Parliament.