Motor insurance: Declined risk pool could be on its way out

Insurers believe that pool won't be required as most risks are taken on company books

The declined risk pool in third party segment for commercial vehicles could be short-lived. This is because the general insurance companies have approached the Insurance Regulatory and Development Authority (Irda) for dismantling it.

In December 2011, Insurance Regulatory and Development Authority (Irda) dismantled the commercial third-party (TP) motor pool and 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. In the earlier TP pool, all risks were put into this pool.

For the remaining vehicles, insurers would be free to underwrite risks independently. To avoid 'cherry picking', insurers were 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.

General insurers, through the General Insurance Council have put in a proposal to remove the declined risk pool. While Irda has not given any feedback on the same, insurers expect the pool to be done away with, in the next 24-36 months.

“The size of the declined risk pool has shrunk from almost Rs 5000 crore when the TP motor pool was there to about Rs 350-400 crore, due to majority of business being underwritten into individual company books. Hence, the slow dismantlement of the pool is the next logical step,” said the chief executive of a private general insurance company.

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 per cent 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, 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.

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.