A year and a half after the third party motor pool for commercial vehicles was done away with, the woes of general insurers are far from over. Combined ratios for the motor insurance segment stand at 130-135% for the industry owing to the losses in the third party motor segment.
A ratio below 100% indicates an insurer is making profits. Inadequate price rises in the third party motor segment and incomplete coverage of third party insurance for those owning vehicles in India have led to high losses.
Motor insurance comprises two segments –own damage cover, which is optional, and the mandatory third party cover. Insurers say that the declined pool has not helped them in reducing loss ratios because the aim of the pool was to enable customers to secure cover for their vehicles, which was termed risky by some insurers. In the light of recent court judgments, the premium rise in third party segment is insufficient.
However, insurers are dealing with this situation by better pricing of comprehensive policies, which would help insurers to substitute for the third party losses.
In December 2011, the Insurance Regulatory and Development Authority (IRDA) had dismantled the commercial third party motor pool. It had decided to constitute a ‘Declined Risk Pool’, effective from first April 2012. The move had freed the pricing model –insurers were able to price vehicles based on claims.
Insurers say that with the dismantling of the pool, the contribution to the pool on account of overall market share had been discontinued. This, coupled with the index-linked annual third-party premium increase, had helped reduce the gap between the claims paid and the premium.
However, the increase in third party premium is not commensurate with the loss ratio in the commercial third party vehicle business. Till the time the pricing is not linked to the loss ratio, the industry would continue to report losses in this segment.
Apart from vouching for an increase in third party premium, the industry is also making pricing for the own-damage segment more comprehensive and efficient to counter-balance the high claims in the third party segment.
Industry experts feel there is an average 15-20% increase in the quantum of claims awarded in third party insurance by courts.
Insurers say that while there is pricing inadequacy, companies had to build reserves to take care of the loss ratios. Therefore, insurers would be more mindful in the own-damage segment, where pricing is not controlled.
Under the Declined Pool, insurers have the right to refuse or decline third party insurance if the asset is found to be too risky to underwrite. The declined vehicle would be given a cover by another insurer,; however, the risk would be ceded or transferred to declined pool. For other vehicles, insurers would be free to underwrite risks independently. This means a differential pricing system, based on claims, age and frequency of accidents would evolve.
After the pool was dismantled and third party premia has increased, the loss ratios of some companies have improved, but not to desired levels.
To avoid cherry picking, insurers are now allowed to decline risks on the basis of parameters such as claims, age of the vehicle, type of the vehicle and geography, as well as other parameters to be decided by the regulator from time to time.
On first April 2013, the IRDA has announced a proposal to increase third party motor premium rates by an average of 35% for vehicles, including private cars and commercial vehicles. The move to raise premium was in line with the regulator’s directive that third party motor premia would be annually revised using a formula based on inflation and claim experience.
The third party motor segment is regulated by the Irda, and therefore, it decides the pricing. The industry has been demanding pricing for this segment is freed.
To cut losses, insurers are reducing dependence on the motor insurance segment and focusing on other segments such as health, fire, marine and commercial lines.
Loss ratios for the third party motor segment have been more than 200 %, meaning the claim amount exceeds the total premia amount paid for the business.
Insurers say that while the third party loss ratio had fallen through the past year, considering the long tail nature of the third party segment (claims can be made for a number of years for damages in any given year), it was unclear whether the ultimate loss ratio would be favourable for insurers.
Under the Motor Vehicles Act, there is no ceiling for the compensation/ claims to be awarded in third party insurance. Therefore, companies have to pay whatever is decided by the courts. An amendment to the Motor Vehicles Act, which seeks a cap of Rs 10 lakh on the compensation to be awarded , is yet to be tabled in parliament.