Motor insurance losses are expected to be steeper from FY16 as the regulator has made it mandatory for insurers to have a minimum percentage of motor third-party (TP) business underwritten.
This is coupled with a much lower increase in motor TP premiums than what the industry had asked for. The Insurance Regulatory and Development Authority of India (Irdai) proposed an increase in premium between 14 and 108 per cent from April 1.
According to Irdai’s exposure draft, small cars (below 1,000 cc) are likely to see a rise of 107.8 per cent in premium. Two-wheelers not exceeding 75cc could see a 14 per cent rise, while the 151-350 cc category will see a 32 per cent increase. However, the premium of high-end bikes above 350 cc could see a drop of 61 per cent in premium rates.
For 2015-16, general insurers had sought at least a 40 per cent increase in motor TP premiums. Senior executives in the sector had said segments such as two-wheelers and autorickshaws that haven’t witnessed very large claims could be incentivised with a lower rate of premium rise, while it could be higher for commercial vehicles. Irdai takes into account the demands of transporters lobby and also that of customer forums before taking a decision on the final rate of premium increase in TP segment.
Further, Irdai has brought out an exposure draft on obligation of the insurer with respect to motor TP insurance business. Irdai said every insurer would have a new minimum percentage of business which they have to underwrite every financial year.
The regulator said every insurer, during a financial year, shall underwrite such minimum percentage of the 90 per cent of the overall motor TP insurance business premium of the industry for the immediate preceding financial year.
Here, the minimum percentage so decided shall be equal to the simple average of insurer’s share in total gross premium of the industry and that in total motor insurance premium of the industry, both in the immediate preceding financial year.
For instance, if an insurer’s share in total gross premium is five per cent and its share in motor insurance premium is 10 per cent, the average here would be 7.5 per cent, which would be the minimum percentage. Hence, this insurer would have to underwrite 6.75 per cent of motor business (7.5 per cent of 90 per cent) in that year.
The Motor Vehicles Act, 1988, provides for compulsory motor TP insurance for vehicles. However, there was no provision either in the MV Act or the Insurance Act regarding the specific obligations of an insurer towards underwriting the motor TP risks.
Under such circumstances, to ensure there were no supply side constraints in the market, Irdai had adopted initiatives like creation of Motor TP pool (now closed), Declined Risk Pool (currently in existence) besides taking regulatory action where necessary.
Also, it was prescribed that no insurer shall refuse motor TP cover to any individual/entity that approaches them.
Motor insurance consists of third-party and own damage segment. While TP covers liability for third-party accidents, own damage covers damage to own self and vehicle. Motor TP prices are regulated by Irdai and are revised annually based on claims experience.
It is expected the obligation of the insurers to underwrite motor TP risks based on a broad approach taking into consideration several relevant factors would ensure equitable distribution of this responsibility.
For the April-December 2014 period, non-life insurers collected Rs 27,132.65 crore of motor premiums. Of this, Rs 14,251.60 came from the motor own damage segment, while Rs 12,881.58 crore came from the motor TP insurance segment.
The losses in the motor segment continue to persist because of the TP segment, where pricing is regulated. Even after the TP pool for commercial vehicles was dismantled and declined risk pool was set-up, the woes of general insurers are far from over. Combined ratios for the motor insurance segment, have stood between 150 and 160 per cent for the industry.
While motor policies are being envisaged for the segment, general insurers are wary of these products, especially in commercial vehicles category, since it is understood that pricing cannot be revised in midst of the policy being in-force.
It is estimated that the combined ratio for motor insurance may even cross 200 per cent by the end of March 31, 2015, on the back of higher claims, especially from commercial vehicles.
Inadequate price hikes in motor TP segment and incomplete coverage of TP insurance for the vehicle owning population in India, where TP cover is mandatory, have led to these losses remaining high. Insurers said the claims ratio is significantly higher, meaning companies paid 60-100 per cent higher claims than the amount of premium earned.
Even though the Road Safety and Transport Bill has proposed a maximum liability of Rs 15 lakh for road accidents under a standard TP insurance cover, customer groups and lobbies representing truck drivers and other transporters are against this. At present, there is unlimited liability for road accidents.
