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In April this year, the Insurance Regulatory and Development Authority (Irda) raised premiums for motor third-party liability insurance by up to 68%, but that hasn’t made non-life insurance companies happy. The reason: third-party motor insurance is a bleeding portfolio for them and all the insurers are stung since the losses are divided among all owing to the third-party motor pool.

For these reasons, insurers have been lobbying hard to get the third-party insurance pool dismantled and are also demanding de-tariffing or a free hand in pricing the cover. However, there are regulatory concerns around the issue.

Read on to understand how can all this affect your third-party premiums.

This cover protects you from any financial liability in case your vehicle causes any damage to life or property of a third person. This is a mandatory cover in your motor insurance policy without which you cannot take out vehicle from the showroom. According to section 146 of the Motor Vehicles Act, 1988, any vehicle that plies on the road needs a third-party cover.

In case of an accident that causes bodily injury or loss of life, the third-party cover is unlimited. The entire amount of compensation is borne by the insurance company. The compensation amount is decided by the court, which usually takes into consideration the earning capacity and age of the injured/deceased person. However, in case of damage to property the maximum liability is limited to Rs.7.5 lakh.

Since the motor third-party cover is under tariffs or fixed by the regulator, the premiums are fixed across insurers and how much you pay depends on the cubic capacity of your vehicle. So for a private car that is below 1000cc, the premium is fixed at Rs.740 and for a car above 1500cc, the premium is Rs.2,750. For commercial vehicles, the premiums are higher and can go up to Rs.11,410.

Though the regulator de-tariffed motor insurance in 2007, it retained control over the third-party motor insurance portfolio to ensure that the mandatory third-party cover didn’t become out of reach for transporters and other vehicle owners.

Adverse claims ratio: However, this has posed a problem for the insurers. Explains Amarnath Ananthanarayanan, chief executive officer and managing director, Bharti AXA General Insurance Co. Ltd: “Under the third-party motor cover, while the premiums are fixed, the liability is unlimited. There needs to be a balance and hence free pricing is needed.”

This lack of balance between the premiums and liability, according to the insurers, has led to an adverse claims ratio, especially with regard to commercial vehicles. Claims ratio is the ratio of premium earned to the claims incurred. Says T.A. Ramalingam, head (underwriting), Bajaj Allianz General Insurance Co. Ltd: “The claims ratio in the case of commercial vehicles is 190% while for private vehicles it is 120%.” In other words, for Rs.100 of premium earned, the insurers are paying out Rs.190 as the claim amount for commercial vehicles.

The pool problem: The third-party pool created in 2006 was a solution to the problem of many insurers refusing third-party cover to customers in order to protect their profit books, specially in the case of commercial vehicles. The pool was created for claims settlement of commercial vehicles and to ensure the participation of all non-life insurance companies.

The third-party motor pool comprises all motor third-party premiums collected by all the non-life insurers for commercial transport. It is from this pool that claims are paid at present. But the claims are paid in the ratio of an insurer’s market share.

For example, suppose the premium collected by the pool is Rs.1 lakh, whereas the claims incurred is Rs.1.5 lakh in a given year. Now company A which has an overall market share of, say, 10% will get Rs.10,000 from the pool as premium income but will have to shell out Rs.15,000 as claim amount—10% of the total premium income and total claims amount, respectively. In other words, regardless of how many policies company A would have underwritten, it will have to incur a loss of Rs.5,000.

This has caused financial strain for the insurers, not to mention the danger it poses to individual claims management of the companies. Explains Ramalingam: “Since the claims are shared by all the insurers, there is no incentive for insurers to better their claims management. For example, if two companies have excellent claims management but the rest in the pool do not, then the two companies will also have to bear the burden.”

The regulator is aware of this problem and, hence, sees dismantling the pool as a possibility, but it has its own concerns.

Says J. Hari Narayan, chairman, Irda: “The problem is of management. The sense of ownership is missing because of the pool. Since all the insurers have to bear the burden of the claim, there is no incentive for insurers to improve their claims management. This in turn will increase the cost and again impact all the insurers. But at the same time dismantling the pool is not easy. The pool was created to achieve a balance between demand and supply, so we need to ensure that happens. Also, when demand exceeds supply (again), then reinforcing the pool will not be easy.”

Even as the industry struggling to find ways to instill better claims management and to get some pricing respite, de-tariffing is not something the regulator is considering right now. But in order to achieve some balance between the price and liability, you may need to pay higher premiums in the future.

Will premiums go up? In April this year, the regulator not only hiked the premiums but also agreed to review the premiums on a yearly basis on the basis of three parameters: average claims for each class of vehicle, frequency of claims for each class of vehicle and cost of inflation index for the year of review.

This may lead to an increase an premium. Says Rahul Aggarwal, director, Optima Insurance Brokers, “While it is certain that premiums will go up, it is not certain by how much. It is unlikely the premiums will go up as much as needed in order to bridge the income payout gap.”

Adds Ananthanarayanan: “Logically, the premiums should go up but there is no way to find out by how much. The weightage assigned to the parameters are not known and hence one can’t say conclusively that moving forward the premium hike will bridge the gap.”

But the hike may not hurt private vehicle owners at all. Says Ramalingam: “It is the commercial vehicles that are causing abject strain on our books and hence a 100% hike in premiums is needed. However, private vehicles will see little impact since the claims ratio are manageable.”

Freewheeling not on the cards: Says Narayan: “You can’t have unacceptably high premiums on third-party cover because one needs to maintain a balance between commercial interest and insurance needs. Also, third party motor insurance constitutes less than 10% of the business and even in other lines of businesses, insurers have not been able to make underwriting profits. For example, health insurance. This portfolio has no price controls, then why are the insurers making underwriting losses? I think insurers should focus more on improving their claims management.”

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