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Third Party Motor Pool Unlikely To Be Reintroduced

third partyLast week finance ministry came out with an order canceling the Insurance Regulatory and Development Authority’s (IRDA) 2011 order to withdraw third party motor insurance pool has created jitters and confusion among general insurers. General insurers are not ready to go back to pooling system which saw them bleed for several years.

The government has directed the IRDA to issue a fresh order in place of order it passed almost two years ago to abolish the third party pool system and follow the system of declined risk pool. The government is of the view that the order suffers from a manifest error.

Insurers say that going back to the pooling system is out of question.  However, they say that IRDA may come up with a fresh order on the ongoing system –declined risk pool-soon, thereby putting at rest speculations around the re-introduction of third party insurance pool. Insurers say that there seems to be a small procedural anomaly in the IRDA’s order in 2011. The government move has provided IRDA with the leeway to rectify the same.

Third party motor insurance pool system prevailed for almost five years from 2007 to 2011 and had aggregated losses to over Rs 8,000 crores. The IRDA decided to do away with the pooling system in December 2011.

In the third party motor pool 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 psu general insurers who mostly offer third party cover for commercial vehicles. In declined risk pool, all general insurers are responsible for the policies they underwrite.

Insurers say that they will continue to follow the ongoing process till the IRDA notifies them to do it otherwise. Insurers say that they are bound only by the IRDA order, so till the time IRDA asks them to not follow the current system and move back to the old one, they will follow the ongoing system.

While IRDA passed an order on March 22, 2014 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 Sen Gupta and B Chakraborti. Comments of two of the three members came after the impugned IRDA order of March 22, 2012, these comments contain specific suggestions that merited consideration consultation should be full and effective before the order is made.

However, the IRDA pointed out that the views of the two members were supportive of its decision to dismantle third party motor pool.

Size of ‘Declined Risk Pool’ Shrunk to Mere Rs 175 crores

Declined risk pool

Shedding their earlier reluctance, general insurance companies are now providing cover for commercial vehicles in a bigger way. This is seen from the size of the ‘declined risk pool’, which has shrunk to Rs 175 crores from Rs 3,500 crores a year ago. The declined risk pool is a mechanism by which insurers transfer risks they are unwilling to have on their books to a pool administered by General Insurance Corporation.

The declined risk pool was itself a replacement of the erstwhile third party motor insurance pool which was set up in 2007 to stem losses that were bleeding general insurers. Claims were often higher than 200% of the premium collected. Under the new declined pool, companies can frame their own underwriting policies and take a call on which vehicles are to be accepted on their own books and which are to be ceded to the ‘declined risk pool.

Looking at the size of the declined pool, it is just about 5% of the earlier pool. So, it has become almost insignificant and one can only infer that it will not make any difference to the market whether this pool remains or is discontinued. The reduction in the size of the pool is a positive development as it shows that now there will be no supply-side constraints for third party motor insurance.

Insurers say that declined risk pool has worked better because insurers have started retaining risks, and they have a choice in what they want to retain. The efficiency of managing claims has also improved as earlier everything was going to the pool.

However, general insurers feel that the pricing of the premium of third party motor insurance, which is determined by Insurance Regulatory and Development Authority (IRDA), is still not adequate and the impact of the retention of risk by general insurers would have to be seen over a longer term.

Severe Penal Action for Refusal of Third-Party Motor Insurance: IRDA

Third Party Motor PremiumInsurance Regulatory and Development Authority (IRDA) has said that severe penal action will be taken against those general insurance companies refusing third party motor insurance. Those Insurance companies which do not abide by the rules, such companies will be visited by very severe penalties which will be more onerous than the business they are foregone.

Third party motor insurance provides cover mainly pedestrians, fare-paying and non-fare-paying passengers in a vehicle.

Private sector insurers try to avoid writing such policies because of high claim ratios in the commercial vehicle space. And this leads to the public sector companies being hit the most.

Recently, IRDA came out with guidelines for the implementation of declined risk pool system. The IRDA has laid down a method for transferring risks to the newly formed Declined risk pool for third party motor policy.

As per guidelines, the declined risk pool would apply to commercial vehicles for standalone third-party liability insurance and no comprehensive motor insurance policy can be settled from the pool.

The size of the pool is likely to shrink to a quarter because of the comprehensive policy going out of the ambit of the pool.

PSU General Insurers Likely to Hike Motor Insurance Premiums by 40%

motor insuranceThe finance ministry has asked state-run general insurers to device new marketing strategies and raise premiums to minimize their third-party motor insurance losses.

This move will result in increase in motor insurance cost. The re-pricing is expected to increase premiums at least by 30-40%.

During 2011-12 total losses of PSU general insurers stood at Rs 6,134 crore and major chunk of it came from motor insurance portfolio. And after scrapping of third-party motor pool the losses are expected to go up further.

The finance ministry has asked PSU general insurers to re-price their comprehensive motor insurance policies so that the combined ratio including claims and commissions does not exceed 100%, or the premium covers the cost of providing the policy.

The general insurers will also explore the possibility of issuing separate policies for own-damage and third-party liability. Own-damage premium is the amount of premium that an insurer gets to provide cover above the mandatory third-party cover.

As per new directive, insurers can’t pay more than 35% of the own-damage premium under discounts, commissions or brokerage and other incidentals such as infrastructure expenses.

Circular also states that insurers can’t pay brokerage or commission for vehicles of more than ten years old.

Insurers have been also directed not to deal with manufactures and dealers in bulk motor business. The circular states that companies which provide such business with heavy claim ratio should be discouraged unless own-damage rates are revised periodically.

Discounts on Own-Damage Covers Lowered by 20%

Protected CarGeneral insurance companies have lowered the discount by up to 20% on commercial and private own-damage motor policies, as third-party motor risk moves to declined pool.

Insurance Regulatory and Development Authority (IRDA) recently scrapped third party motor pool and replaced it with declined pool. It will have lower industry contribution for insurance cover at about Rs 1,200 crore against Rs 6,000 crore earlier.

Discounts on motor own-damage have come down after IRDA increased premiums on third party premium rates.  This year third party premium has been increased by 10%.

Third-party motor risk, which earlier went to third party motor pool, will now be borne by individual companies and they have to take claims on their book. This will prompt companies to emphasise on better underwriting and management of risk.

Motor insurance policy basically consists of two parts i.e. third-party-liability and own-damage covers. Third party cover is mandatory by law while own-damage cover is optional.

ICICI Lombard’s Premium Collection Increased by 22% in 2011-12

Icici LombardPrivate insurer ICICI Lombard General Insurance has reported 22% growth in total premium collection at Rs 5,358 crore for 2011-12. Company’s Gross Written Premium (GWP) stood at Rs 4,408 crore in FY’11.

Number of policies issued increased by 34% at 76 lakh for FY’12 as against 56 lakh in FY’11. During 2011-12 company settled 44 lakh claims. As of 31 March 2012 Company’s solvency ratio stood at 1.36 times.

Company had profit before tax of Rs 290 crore in FY’12 (without taking in account additional impact of third party motor pool) which is the rise of 53% over FY’11 (without taking in account additional impact of third-party motor pool).

Insurance Regulatory and Development Authority (IRDA) has allowed insurers to recognize the additional liabilities of third party motor pool in its entirety in FY’12, or amortise the liabilities on a straight line basis over up to three years. The company has decided to absorb the additional liabilities in the current year itself. The additional liabilities on motor pool had impacted the company’s FY’12 performance by Rs 685 crore.

ICICI Lombard General Insurance Company is a joint venture between ICICI Bank holding 74% stake and Canada based Fairfax Financial Holding Ltd holding remaining 26% stake.

Premium Rates for Commercial Vehicles Likely to Rise from April

save on commercial auto insurance costsInsurance premium rates for commercial vehicles are expected to be increased by up to 50% from first April 2012. These risks are considered as bad risk in general insurance industry because of higher number of accidents and claims arising out of them.


General insurers are planning to increase premium on commercial vehicle’s own-damage insurance covers as they are hoping to sell enough comprehensive (own-damage and third party) insurance policies to compensate the additional risk they take on the stand-alone third party policies due to the abolishment of third party motor pool.


There will be around 50-60% hike in the premium of commercial vehicle comprehensive insurance policy. Premium under third party component of comprehensive and third party policy will also rise.


At present general insurance industry from commercial vehicles segment collects premium around worth Rs 6,000 crore.


However, insurers are not clear how they will be able to attract commercial vehicle owners to pay higher premiums towards own-damage covers and not just opt for cheaper standalone third-party cover. More so, when commercial vehicle owners are tended to buy stand-alone covers till now.


As of now insurers were not interested to sell comprehensive covers to commercial vehicle owners and instead they were pushing stand-alone third party policies to them.


Earlier claim from standalone third party policies refused by insurers were serviced by third party pool set up collectively by all general insurers. In this pool claims of some insurers were very high compared to their contribution to the pool hence; other insurers felt they were unfairly forced to bare third party risks emanating whose claims were higher.


Last year an Insurance Regulatory and Development Authority (IRDA) committee’s report on Declined pool has also accepted that third party motor pool for standalone party insurance cover for commercial vehicle is not sustainable as there premiums are very low compared to their claims.


Claim ratio on commercial vehicle third party pool is above 200 % that means for every Rs 100 premium collected insurers have to pay out claim of Rs 200.


IRDA has decided to do away with standalone third party motor pool system from first April 2012 and replaced it with declined risk pool system for standalone third party policies. This system will punish those insurers whose claim ratios are higher than their premiums. Hence, more insurers though still legally will be required to offer standalone third party policies will now push comprehensive insurance policies covering own-damage cover and third party cover. Premium for third party cover are tightly regulated by IRDA.


Under declined risk pool system each insurer will be required to fulfill minimum percentage of commercial vehicle third party insurance. If insurer will fail to meet the minimum requirement then risk from declined pool will be distributed on the basis of their average total portfolio and motor insurance turnover.


Declined risk pool will be smaller in size and will encourage insurers to manage third party claims efficiently which will bring down claim ratios in motor insurance segment.

Bharti Axa General Eyeing 45% Growth in Next Fiscal

Bharti-AXA-General-InsurancePrivate sector insurer Bharti Axa general insurance company is expecting to post growth of 45% in gross premium collection in next financial year.


As per the company this growth will be driven by the introduction of declined risk pool system and expected hike in the premium rates in commercial vehicle space.


Insurance Regulatory and Development Authority (IRDA) has decided to dismantle the third party motor pool system from next fiscal and replaced it with declined risk pool system.


According to the third party motor pool, all commercial-third party premiums were pooled and losses arising due to commercial third-party portfolio were shared among all general insurers, as per their market share.


However, in declined risk pool system, an insurer will have the right to refuse a vehicle insurance, which will be subsequently insured from the declined pool.


For next fiscal apart from motor insurance segment another focus area for the company will be health insurance segment. At present motor and health insurance segment together contributes 90% to the company’s total premium collection.


During April 2011-February 2012 company’s premium collection stood at Rs 774 crore against Rs 492 crore in corresponding period last year. Earlier company has set a target to cross Rs 800 crore mark in current fiscal.


Bharti Axa general insurance is a joint venture between Bharti enterprises holding 74% stake and France based Axa holding 26% stake.

IRDA Relaxed Solvency Norms for General Insurers

General-InsuranceAs general insurance industry is facing a hit of Rs 10,000 crore on its bottom line due to third party motor pool losses, Insurance Regulatory and Development Authority (IRDA) have given them some relief.


Companies will be allowed to provide their losses in three trenches by 30 June 2014. Apart from this, they can also maintain lower solvency norms, at 1.3 and 1.4 for FY’12 and FY’13 respectively. However, from 2013-14 norms will get back to the prescribed level of 1.5.


According to the new directives, now insurers will have to provide for the liabilities of 2007-08 and 2008-09 by 30 June 2012. Losses for 2009-10 should be provided by 30 June 2013. And losses for 2010-11 and 2011-12 will have to be provided by 30 June 2014. However, all companies will also have the option to settle the entire liabilities at one go, by the end of current month.


Last December IRDA scrapped the commercial third party motor pool and said it should be dismantled on clean-cut basis that means losses from FY’08 to FY’12 would be shared in accordance with the new loss ratios as prescribed, which will be in the range of 153-213%. All the provisions were expected to be provided for by 31 March 2012, taking 153% as the loss ratio.


Contribution of each insurer towards the pool will be based on the market share of the insurer in all lines of business.


Pool administrator was to distribute the losses among the insurers, based on the motor premium written in the current financial year, but taking the loss ratio at 163-213%, depending on the financial year. This will mean additional loss of Rs 11,000 crore for the general insurance industry, taking into all the liabilities since the pool was formed in 2007.


Loss ratios for the current fiscal will be 213%, for FY’11 will be 183%. Loss ratios for FY’10 will be 163% and for FY’09 153%.


Loss ratios in excess of 100% means for every Rs 100 premium collected, claim paid are over Rs 100.


During 2010-11 all general insurers collected total premium of Rs 44,000 crore of which Rs 18,000 crore were of motor insurance. Typically, third party liabilities account for 35% of the total motor premium. Hence, in FY’11 general insurance industry took a hit of Rs 10,250 crore on account of commercial third party motor pool losses.


To distribute the losses among the insurers, third party motor pool was formed in April 2007, for the commercial vehicle third party motor insurance business.

Govt. may infuse Rs 1,000 crore in two PSU general insurers to protect their solvency

Non-Life InsuranceGovernment may have to infuse Rs 1,000 crore in two public sector general insurance companies Oriental insurance and National insurance to protect their solvency margins requirement by March.


Of four PSU general insurers Oriental insurance and National insurance may face solvency constraint due to increased provisioning for third party motor pool. There solvency ratio might fall below required 110% at the end of 2011-12 after paying towards third party motor pool. Both insurers have to provide around Rs 500 crore to Rs 700 crore each towards the pool depending on their market share. At the end of September 2011 solvency ratio of Oriental insurance was 149% while that of National insurance was 136%.


Third party motor cover is mandatory for all vehicles by law hence every company write policies and claims are settled through a common pool. Contribution for the pool depends on the market share of each company.


All four public sector non-life insurance companies have market share of 50%.


As per National insurance if provisioning had gone up by 180% then it would not had impacted its solvency but sharp increase of 213% will impact their balance sheets and solvency as well.