Third-party motor segment a burden on insurers

Combined ratios for the motor insurance segment stand at 130-135% for the industry

A year and a half after the third-party pool for commercial vehicles was done away with, the woes of general insurers are far from over. Combined ratios for the motor insurance segment stand at 130-135 per cent for the industry, owing to losses in the third-party motor segment.

A ratio below 100 per cent indicates an insurer is making profits.

Inadequate price rises in the third-party motor segment and incomplete coverage of third-party insurance for those owning vehicles in India have led to high losses. Insurers said the claims ratio was significantly high---companies paid claims that were 60-100 per cent higher than the premium earned. Motor insurance comprises two segments — own damage cover, which is optional, and the mandatory third-party cover.

Vijay Kumar, chief technology officer, Bajaj Allianz General Insurance, said, “The pool has not helped us in reducing loss ratios because the aim of the pool was to enable customers to secure cover for their vehicles, which was termed risky by some insurers. In the light of recent court judgments, the premium rise in the third-party segment is insufficient. However, we are dealing with this situation by better pricing of comprehensive policies, which would help us substitute for the third-party losses.”

In December 2011, the Insurance Regulatory and Development Authority (Irda) had dismantled the commercial third-party motor pool. It had decided to constitute a 'declined' pool, effective April 1 2012. The move had freed the pricing model — insurers were able to price vehicles based on claims.

Mukesh Kumar, head (human resources, - HR, marketing and strategy planning), HDFC ERGO General Insurance, said with the dismantling of the pool, the contribution to the pool on account of overall market share had been discontinued. He added this, coupled with the index-linked annual third-party premium increase, had helped reduce the gap between the claims paid the premium.

“However, the increase in third-party premium is not commensurate with the loss ratio in the commercial third-party vehicle business. Till the time the pricing is not linked to the loss ratio, the industry would continue to report losses in this segment,” he said.

Apart from vouching for an increase in third-party premiums, the industry is also making pricing for the own-damage segment more comprehensive and efficient to counter-balance the high claims in the third-party segment. K G Krishnamoorthy Rao, managing director and chief executive of Future Generali India Insurance, said industry experts felt there was an average 15-20 per cent increase in the quantum of claims awarded in third-party insurance by courts.

Sanjay Datta, head (underwriting and claims), ICICI Lombard, said while there was pricing inadequacy, companies had to build reserves to take care of the loss ratios. Therefore, insurers would be more mindful in the own-damage segment, where pricing wasn’t controlled, he added.

Under the declined pool, insurers have the right to refuse or decline third-party insurance if the asset is found to be too risky to underwrite. The declined vehicle would be given a cover by another insurer; however, the risk would be ceded or transferred to the declined pool. For other 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.

“After the pool was dismantled and third-party premia have increased, the loss ratios of some companies have improved, but not to desired levels. We are proactively approaching customers, even in remote areas, to ensure their uninsured vehicles are insured,” said Madhukar Sinha, national head (personal lines), Tata AIG General Insurance.

To avoid ‘cherry-picking’, insurers are now allowed to decline risks on the basis of parameters such as claims, age of the vehicle, type of the vehicle and geography, as well as other parameters to be decided by the regulator from time to time.

On April 1 this year, Irda had announced a proposal to increase third-party motor premium rates by an average of 35 per cent for vehicles, including private cars and commercial vehicles. However, general insurers feel the rise in premium rates of third-party motor premia wasn’t adequate.

To cut losses, insurers are reducing dependence on the motor segment. Rakesh Jain, chief executive of Reliance General Insurance, said the company would reduce dependence on motor insurance considerably, while increasing health insurance and the fire, engineering and marine portfolios significantly.

Loss ratios for the third-party motor segment have been more than 200 per cent, meaning the claim amount exceeds the total premia paid for the business. Bhaskar Jyoti Sarma, managing director and chief executive, SBI General, said while it was true the third-party loss ratio had fallen through the past year, considering the long tail nature of the third-party segment (claims can be made for a number of years for damages in any given year), it was unclear whether the ultimate loss ratio would be favourable for insurers. He added to mitigate its claims cost, SBI General was focusing on a proactive claims management process.

The move to raise premium was in line with the regulator's directive that third-party motor premia would be annually revised using a formula based on inflation and claim experience. The third-party motor segment is regulated by Irda and, therefore, it decides the pricing. The industry has been demanding pricing for this segment be freed.

Under the Motor Vehicles Act, there is no ceiling for the compensation/claim to be awarded in third-party insurance. Therefore, 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 to be awarded, is yet to be tabled in Parliament.