When the Insurance Regulatory Development Authority (Irda) proposed a steep hike in the third party motor insurance premium last week, it did not come as a surprise. Although the general insurance industry has largely been moving in the right direction after the sector was liberalised 14 years ago, the third party (TP) segment, the largest contributor to the industry’s kitty, remained an exception. The TP portfolio has deteriorated and the industry keeps on losing around Rs 10,000 crore every year on account of this portfolio.
The regulator has proposed a maximum hike in the small car segment. So, if you’re planning to buy a Nano, the premium may go up to Rs 2,227 from Rs 941 earlier. The Irda has proposed a 136.62 per cent hike in TP premium for cars with an engine capacity of less than 1,000 cc from FY15.
Irda’s proposal to hike third-party premium is generally across the board with only select segments — in which the claims were less — witnessing a reduction in premium. For example, in the case of two-wheelers with engine capacity of 350 cc, it has proposed to reduce the premium from Rs 804 to Rs 306, a reduction of 61.97 per cent. For goods-carrying vehicles (public carriers) exceeding 40 tonnes, the premium will go up by 111.12 per cent from Rs 15,035 to Rs 31,742.
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The regulator has proposed a steep rise of 25-137 per cent for private cars and 1-45 per cent for two-wheelers in third party premium for FY15. For goods carriers, the proposal is for a hike of up to 111.12 per cent.
“Based on the figures and seeing the claims experience, in our opinion, an increase of 40 to 50 per cent is what is needed to make the portfolio break even,” said G Srinivasan, chairman and managing director of New India Assurance. “While the annual increase is a good practice, the premium has not matched up with the claims. So, we hope the regulator will take that into account.”
The TP portfolio has the largest number of business litigations with 10 lakh such cases pending in various courts. Estimates suggest there is an average 15-20 per cent increase in the quantum of claims awarded in TP insurance by courts.
The average loss ratio for the third party business is in the range of 140 per cent. This means a general insurer pays out a claim of Rs 140 as against a premium income of Rs 100, leading to big losses for the industry. Motor insurance in India has two components: own damage cover and third-party cover. The latter is compulsory to cover third-party damage in terms of property or life. As per the Indian laws, no vehicle is supposed to be on the road without this cover.
While own damage business is a profitable portfolio for insurance companies, third-party motor insurance is a loss-making proposition. In the wake of the high claims ratio from commercial vehicles, insurance companies provide insurance cover to risky customers like commercial vehicles from a common ‘declined pool’ created specifically for the purpose, and not from their own books. Irda administers the TP pricing and reviews the rates annually based on a pre-determined formula. Irda takes into account various factors including the loss ratios for insurers, inflation and higher awards by judiciary.
TP premium has been rising for several years now. Irda increased the third party premium rates in 2011-12 on an average by 58 per cent, 15 per cent in 2012-13 and 20 per cent for 2013-14. Last year, third-party motor insurance rates had gone up by an average 18-20 per cent after transporters opposed the 60 per cent hike demanded by insurers.
WRONG TIME & HIGH PROVISIONING
Motor is the largest segment (share of 46 per cent), but growth expected to moderate in line with decline in growth in automobile industry. The hike in premium is coming at a wrong time when vehicle sales have taken a beating and the country is facing a slowdown.
“There is a high co-relation between the premium volumes of the general insurance industry and the national GDP growth rates. The recent slowdown in the economic activity has impacted the volumes,” said Karthik Srinivasan, Sr VP, Co Head Financial Sector Ratings, ICRA Ltd.
In November, Irda sharply increased the provisioning (the money general insurance companies need to set aside to meet the high level of claims) to 210 per cent of the claims from 145 per cent, based on the loss estimates by an actuarial committee. The requirement of 210 per cent reserve itself is very conservative considering the hikes in TP premium in the earlier years. “Today we (the industry) have the figures to justify the premium increase. Ever since the motor pool was launched, the industry has been building an extensive database. Based on the data, we are asking for an increase in rates and I am sure the transporters association will understand that,” said Srinivasan of New India.
The regulator has been considering detariffing the motor third party insurance segment which, some experts feel, will enable customers to choose market driven premium rates and the insurer of his choice based on the price and other considerations. At the same time, the regulator can impose a ceiling on the premium rates so that the customer gets the mandatory cover at a reasonable price.
However, industry veterans say that the proposed hike is unfair. “In the case of private cars up to 1,000 cc, the increase is 137 per cent and for motor cycles of 100-150 cc, the jump is 50 per cent. But there is an irony. The hike is based on the data of Indian Information Bureau (IIB) which admits in its disclaimer that it has not validated the data and has uploaded the figures as validated by the insurance company concerned. It also admitted that ‘there could be errors and omissions’,” said an industry source.
According to former Irda member KK Srinivasan, the insurance regulator should give up fixing motor TP premium, giving assured premium increases to insurance companies at regular interval. The methodology used to fix the premium is faulty, unfair and one sided. While all the debits namely claims, fixed costs and variable costs, have been taken into account, the credit accruing to policy holders on the income from investment of insurance companies from the premium have not been reckoned at all. The investment income of insurance companies is sizable. All premiums are collected by insurance companies in advance and the longer the delay in settling claims, the longer the money stays with the insurance companies.
In all other classes of P&C business where detariffing has taken place and pricing freedom given to insurance companies, the premiums have come down drastically, thanks to competition. There is thus a strong case from the policy holders perspective to detariff motor TP premiums. If this happens, the premiums are likely to come down drastically and benefit the motor policy holders.
Though externally, insurance companies are supporting detariffing of motor TP premium, there is a perception that behind this facade they are working for retention of the tariff where they get assured increases in premium rates by Irda instead of facing the prospects for drastic reduction in premium in a competitive detariffed environment, Srinivasan said.