Higher compensation for third-party accidents may result in better premiums

The introduction of a universal amount will result in faster compensation to the families of victims, and they will be saved the hassle of going to the courts

The Ministry of Road Transport and Highways recently amended the compensation for third-party accidents. The government has notified that the compensation for third-party accidents will be increased to Rs 500,000 for death and Rs 50,000 for permanent disability. The changes came into effect from May 22, 2018. Policy holders will receive compensation according to the new rules for any third-party claims made on or after May 22, 2018. 

Earlier, for third-party death the minimum amount payable was Rs 50,000. According to the notification, the compensation payable now will be Rs 500,000 for fatal accidents resulting in death. For fatal accidents resulting in permanent disability, earlier the minimum compensation payable was Rs 25,000. This has now been increased to Rs 50,000. But the compensation amount for accidents resulting in minor injuries remains the same at Rs 25,000.  

The number of motor accidents resulting in death or injury to third parties continues to rise on Indian roads. Previously, the compensation amount for these cases used to be decided by the courts. This took almost two to three years to settle. But now a universal amount has been introduced for all. “A fatal accident leads to financial hardships for the family of the deceased or the injured person. This step has been taken by the government to ensure that compensations are awarded fast and appropriately,” says Bisheshwari Singh, chief marketing officer, Universal Sompo General Insurance. 

The notification further states that with effect from January 1, 2019, the amount will increase by 5 per cent annually for all types of compensations. Hence, from next year the compensation payout for accidents leading to death will be Rs 525,000 and for permanent disability the amount will be increased to Rs 26,250. However, it is not yet clear whether the 5 per cent increase will be on a simple or compounded basis. Experts say this step has been taken to keep pace with inflation.  

After the government's notification on increased compensation for third-party, premium rates of motor insurance may rise. “There may not be any immediate impact on third-party premium rates. IRDAI typically increases third-party rates every year. This year was an exception when third-party rates went down,” says Tarun Mathur, chief business officer, Policybazaar.com. 

Third-party premium rates may rise after April 2019, depending on the number of claims received and third-party losses seen by insurance companies. “Premiums for third-party covers may rise around 10-20 per cent over and above the annual revision of third-party premium,” adds Singh. Since third-party is a mandatory cover, policyholders will have to comply with the premium hike.

Prior to this notification, according to insurance companies, for accidents resulting in death, though the payout ranged from Rs 50,000 up to any amount decided by the court, the average claim size for general insurance companies for a death claim was around Rs 300,000 to Rs 400,000. “The general insurance players will witness certain impact on pending claims on their books and the overall industry will be affected to the tune of Rs 100-250 billion,” says Singh. 

At present, people don't make claims for third-party injuries or deaths because of the hassle of going to the courts, and the long time it takes to get compensation awarded by them. But now, with an amount having been fixed, the industry may see third-party claims wise as awareness about the new compensation norms increases, and the compensation amount is also increased by 5 per cent each year.