Insurers see red over Irdas R7k-cr provisioning order

Written by Sitanshu Swain | Mumbai | Updated: Mar 7 2011, 07:02am hrs
The R35,000-crore general insurance industry has said it could go insolvent if the recent Irda directive for provisioning an additional R7,000 crore by March for third-party motor business is implemented. In a letter to the Insurance Regulatory and Development Authority (Irda), the General Insurance Council (GIC) has said the regulators estimate of their extant liabilities on third-party motor portfolio is grossly exaggerated.

The general insurers have said they should be allowed to amortise these losses over a period of three years and also sought Irdas approval for a hike in the premium for third-party motor portfolio.

The GIC, which consists of 21 players including four public sector firms, had an emergency meeting on March 1 to discuss the explosive issue. It would be impossible to meet the new requirement by this year-end. General insurers should be allowed to raise the premium for third-party motor portfolio. We understand that Irda is seized of the matter and hope the regulator would find a way out of the situation, said M Ramdoss, chairman and managing director, New India Assurance, the largest general insurance company in the country.

In order to make the commercial vehicle third-party liability portfolio viable, Irda should raise the regulated price for the portfolio by a minimum of 85% with effect for April 1, 2011. An increase of value lower than this would continue to jeopardise the sustenance of the portfolio and consequently the industry, said the GICs letter to the insurance regulator.

Also, there should be a mechanism for annual increase of premium by aligning it to an existing index such as the consumer price index or minimum wage inflation. Going forward, the third-party liability portfolio should also be de-tariffed, said the letter.

A top official of Irda told FE that the regulator is currently considering all these issues.

The general insurers have to now shell out the extra capital to take care of the under provisioning by March 11. If anybody is facing any problem we are willing to consider them on a case by case basis. We may not give them more time to meet the new requirement, said the official.

The general insurance industry till March 10 has over 66,000,00 pending third-party motor claims for settlement. As it takes time to settle claims, which sometimes see prolonged legal battle between policy holders and general insurers, the existing norms say the general insurers need to provide for the future claims in the balance sheet of the same year when the claims happen. The general insurers used to calculate their claim ratio at around 130% (for every R100 premium, R130 of claims for the pending claims). But in the recent Sarla Verma case, Supreme Court changed the way general insurers calculate their future claims for third party motor business.

Accordingly Irdas special report prepared by KP Sharma, a well-known actuary raised the claim ratio to 185% and concluded that general insurance industry need to bring in over R7,000 crore by March 11 to make up the under-provisioning in the last four years.

The general insurance industry consists of state-owned companies like New India Assurance, United India and private sector companies like ICICI Lombard General Insurance, Bajaj Allianz General Insurance, Tata AIg General Insurance, Reliance General, HDFC Chubb General Insurance.