Having realised that the losses for general insurance companies were only rising on account of the third party motor pool system that prevailed for almost five-year period between 2007 and 2011 and had aggregated losses to over Rs 8,000 crore in that period, the Insurance Regulatory and development Authority (Irda) decided to do away with the pooling system in December 2011 bringing much relief to the industry that had been asking for the same.
However, the last week’s order from the finance ministry to cancel the Irda’s 2011 order to withdraw third party insurance pool in motor insurance has created jitters as well as confusion among the general insurers who do not seem to be ready to go back to the pooling system which saw them bleed for several years.
While they maintain that going back to the insurance pool system is out of question, there is a feeling within the industry that Irda may come up with a fresh order on the ongoing system — of declined risk pool — soon, thereby putting at rest the speculations around the re-introduction of third party insurance pool in motor insurance.
“There is no comment by the finance ministry on the Irda order and there seems to be a small procedural anomaly in the order passed by the insurance regulator in 2011. The government’s move now only provided Irda with the leeway to rectify the same,” said the chief executive officer of a large general insurance company.
There is, however, no clarity on the process that the companies will follow for the time being while settling the claims.
“Only Irda can decide on what is the process that insurer’s should follow and till now we have not received any communication from the regulator,” said an insurer.
Another insurer told that they will continue to follow the ongoing process till the regulator notifies them to do it otherwise.
“We are bound only by the Irda order, so till the time Irda asks us to not follow the current system and move back to the old one followed between 2007 and 2011, we will follow the ongoing system,” said the insurer.
Some are of the opinion that Irda may soon come up with an order with the desired corrections and the ongoing system will prevail. The industry is therefore waiting eagerly for the next move of Irda.
Earlier in the week the government directed the regulator to issue a fresh order in place of the order it passed almost two years to abolish the third party pool system in motor insurance and follow the system of declined risk pool.
“The government is of the view that the order suffers from a manifest error. The order is set aside. The matter is remanded to the authority to pass a fresh order after following a procedure laid down in the law including full and effective consultation… under the Insurance Law,” said an order by Anup Wadhawan, joint secretary, department of financial services in the finance ministry. The order follows an appeal from the general Insurance Corporation.
Introduced in 2007, in a third party pooling system, the premium pertaining to the third party risk is collected by all general insurance companies and the claims are met from the same by the public sector general insurers who mostly offer the third party cover for commercial vehicles.
However, with mounting losses for insurers within that system the Irda through an order dated December 23, 2011 decided to dismantle the Indian motor third party pool with effect from 31st March 2012 and to move to the declined risk pool where all general insurers are responsible for the policies they underwrite.
An insurer told that in the five year period between 2007 and 2011 that the third party pooling system prevailed, the industry suffered losses of around Rs 8,000 crore.
Experts say that while Irda passed an order on March 22, 2012 stating the methodology of transfer of risks among members of Indian motor third party declined risk insurance pool, the finance ministry’s decision states that Irda did not follow the mandatory legal procedure in its order and did not take into account the views of a consultative committee appointed for the purpose that included GN Bajpayee, D Sengupta and B Chakraborti.
“Comments of two of the three members…came after the impugned Irda order of March 2012. These comments contain specific suggestions that merited consideration … Consultation should be full and effective before the order is made,” the finance ministry noted in its order.
While the Irda has pointed out that the views of the two members were supportive of its decision to dismantle the third party motor pool, experts feel that it is a procedural issue and Irda can pass the order to dismantle third party motor pool taking note of the comments of the consultative committee and put the issue at rest.