Insurers must provide Rs 7,000 cr more for 3rd party motor biz

Written by Sitanshu Swain | Mumbai | Updated: Feb 10 2011, 17:32pm hrs
Insurance regulator Irda wants the general insurers to provide additional Rs 7,000 crore for their third party motor business.

The general insurance companies which are already bleeding on account of excess claim over premiums are meeting in an emergency meeting on Thursday to discuss the issue. Irda had asked K P Sarma,an actuary to take stock of the financials of the third party motor pool which manges the third party motor business of the all general insurers.

Sarma in his confidential report has found a huge gap in terms of provisioning against claims by the pool. The report has concluded that the third party motor pool has to provide additional amount of Rs 7,744 crore to take care of the regulatory requirement,

Any dues against third party will ultimately be passed on the the general insurance companies who are its members. If implemented the general insurers feel it may make many general insurance companies insolvent as these companies are already hit by huge underwriting losses.

Particularly, the motor business contributes a lot of loss to the general insurers. The general insurers however depend upon the motor business as it gives them day to day liquidity. But the business doesn't have reinsurance. The Irda report if implemented would totally complicate our business,'' said CEO of private sector general insurance company.

Irda report says steps may be taken by GIC which manages the motor pool to ensure that all money transferred by them back to individual companies are held by the companies in a segregated and identifiable account, including back up by known assets.

GIC may devise an appropriate format to obtain information every month, on assets backing the Pool liabilities. Further, the pool accounts currently do not publish information in a balance sheet format although revenue account is made out. The additional provisioning on third party motor business is necessary as the incurred loss ratio has to be grossed up for losses not known and likely to be known giving an estimate of 144.75% as the likely loss ratio. However, the Supreme Court judgment in the Sarla Vermas case may increase compensation in most cases in future by 30% to 50%.

There could be other influences which increase claim costs as a natural process of inflation. Such claim inflation (natural as well as other factors such as judicial pronouncements) would affect future payments only. The incurred loss ratio of 126.66%, included 52.91% as paid claims and the balance as known but still to be paid claims.

Assuming an average increase of 30% on all future settlements in respect of known but unpaid claims and not known and to be paid claims, the ultimate loss ratio may be estimated at 172.30%.