Motilal Oswal sector of the week: Motor Insurance; top bets, target here

Motilal Oswal believes looking ahead, motor insurance's growth outlook remains constructive; brokerage's top pick in this space is ICICI Lombard General Insurance

The motor insurance sector is entering a phase of strong volume-led growth, supported by a sharp recovery in vehicle sales across two-wheelers, passenger vehicles, and commercial vehicles. Recent goods and services tax (GST) rationalisation on select vehicle categories, an extended festive season, and improving consumer sentiment have materially lifted vehicle registrations over the past two months. 

 

This has translated into a meaningful expansion of the insurable base, driving a strong pickup in Motor Own Damage (OD) premiums, particularly in two-wheelers and mid-segment passenger vehicles where affordability gains are most visible.

 

Industry data indicate that the rebound has been broad-based. Two-wheelers have led the recovery, benefiting from improved rural sentiment and better financing availability, while passenger vehicles continue to see healthy traction driven by sustained SUV demand and new model launches. 

 

Commercial vehicle volumes have also strengthened, aided by higher freight movement, infrastructure activity, and pre-buying ahead of regulatory transitions. Together, these factors have resulted in robust OD premium growth, closely tracking new vehicle registrations, while renewals have remained largely stable.

 

However, despite the favourable demand environment, the sector continues to face intense pricing pressure. Competitive intensity remains elevated, with insurers aggressively discounting OD premiums and offering higher distributor payouts to defend or gain market share. 

 

This dynamic is particularly pronounced in price-sensitive segments such as two-wheelers and mid-level passenger vehicles. As a result, incremental premium growth is being driven largely by first-year policy issuances rather than any meaningful improvement in yields.

 

Profitability remains under strain, as combined ratios across the motor portfolio stay structurally elevated. Rising repair inflation—driven by technology-rich vehicle components, higher labour costs, and elevated claim frequency in dense urban regions—continues to push up claim severity. At the same time, acquisition and servicing costs remain sticky, with higher commissions and sustained digital acquisition spends preventing a moderation in expense ratios. 

 

The Third-Party (TP) segment adds to the pressure, as modest regulatory rate revisions have not kept pace with escalating loss costs, creating a persistent disconnect between pricing and claims trends.

 

Looking ahead, the sector’s growth outlook remains constructive, underpinned by strong vehicle sales momentum, rising vehicle ownership, and expanding digital distribution. However, a meaningful recovery in underwriting profitability is expected to be gradual. In this environment, insurers with disciplined underwriting practices, stronger renewal franchises, effective claims management, and tighter cost controls are better positioned as the industry gradually transitions from a volume-led cycle towards more rational pricing over the medium term.

ICICI Lombard General Insurance – Target: ₹2,300

ICICI Lombard General Insurance Company is the largest private motor insurer and remains well placed to benefit from the ongoing recovery in vehicle sales and the resulting expansion in the insurable base. With a market share of around 10.7 per cent in the motor segment, including an industry-leading presence in Motor Own Damage and the largest private-sector share in Motor Third Party, the company continues to demonstrate strong competitive positioning. 

 

While Motor OD growth lagged the industry in the recent quarter due to temporary softness in auto sales and aggressive discounting, momentum has turned positive since October, aided by GST reductions, festive demand, and improving consumer sentiment. This trend is expected to sustain as pricing discipline gradually improves. 

 

In Motor TP, upcoming rate revisions and the company’s extensive distribution network should support a recovery in growth and market share. Over the medium term, healthy premium growth, improving combined ratios, and stable performance across other lines strengthen the investment case, supporting our positive stance.

 

(Disclaimer: This article is by Motilal Oswal Financial Services research desk. Views expressed are their own.)