premium income of Rs 100, leading to big losses for the industry. Motor insurance in India has two components: own damage cover and third-party cover. The latter is compulsory to cover third-party damage in terms of property or life. As per the Indian laws, no vehicle is supposed to be on the road without this cover.
While own damage business is a profitable portfolio for insurance companies, third-party motor insurance is a loss-making proposition. In the wake of the high claims ratio from commercial vehicles, insurance companies provide insurance cover to risky customers like commercial vehicles from a common ‘declined pool’ created specifically for the purpose, and not from their own books. Irda administers the TP pricing and reviews the rates annually based on a pre-determined formula. Irda takes into account various factors including the loss ratios for insurers, inflation and higher awards by judiciary.
TP premium has been rising for several years now. Irda increased the third party premium rates in 2011-12 on an average by 58 per cent, 15 per cent in 2012-13 and 20 per cent for 2013-14. Last year, third-party motor insurance rates had gone up by an average 18-20 per cent after transporters opposed the 60 per cent hike demanded by insurers.
WRONG TIME & HIGH PROVISIONING
Motor is the largest segment (share of 46 per cent), but growth expected to moderate in line with decline in growth in automobile industry. The hike in premium is coming at a wrong time when vehicle sales have taken a beating and the country is facing a slowdown.
“There is a high co-relation between the premium volumes of the general insurance industry and the national GDP growth rates. The recent slowdown in the economic activity has impacted the volumes,” said Karthik Srinivasan, Sr VP, Co Head Financial Sector Ratings, ICRA Ltd.
In November, Irda sharply increased the provisioning (the money general insurance companies need to set aside to meet the high level of claims) to 210 per cent of the claims from 145 per cent, based on the loss estimates by an actuarial committee. The requirement of 210 per cent reserve itself is very conservative considering the hikes in TP premium in the earlier years. “Today we (the industry) have the figures to justify the premium increase. Ever since the motor pool was launched, the industry has been building an extensive database. Based on the data, we are asking for an increase in rates