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.
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 continued…
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