Irdas exposure draft, which has invited comments till the end of this month, proposes to increase the liability cover for two-wheelers below 75 cc by 45% and for those in the 75-150 cc bracket by a marginal 13%. For commercial vehicles in the 20,000-40,000 kg range, premiums may rise by over 50%. (See graph for segment-wise details.)
The proposed hike in the mandatory cover rates will be the fourth one in as many years, and the increase will be apply to almost all categories of vehicles. Motor insurance continues to be the largest segment for non-life insurers. it constitutes damage to ones own vehicle and third-party insurance.
Any vehicle that plies on the road needs a third-party cover under the Motor Vehicles Act, and insurers have to make sure that the insurance cover is available at their underwriting offices. In fact, to arrive at the new third-party motor premium in April, the regulator used data with the Insurance Information Bureau for the experience period of the underwriting years (2007-08 to 2012-13) for the number of policies, the number of claims reported and the amount of claims paid up to March 31, 2013.
Third-party liability is decided and awarded by the judiciary taking into account the age of the deceased, the earning capacity and wages, which keep rising due to inflation and other factors. Based on these parameters, the regulator had put in place a formula last year to calculate the pricing annually.
In April last year, Irda revised motor insurance third-party premium rates, which led to the liability cover for private cars becoming 20% costlier than the previous year. For two-wheelers, the mandatory cover cost rose by 18% and, for a few categories of commercial vehicles, rates came down from the previous year. The overall percentage increase in motor insurance third-party portfolio in 2013 was around 19%.
In April 2012, the regulator had placed third-party under the declined risk insurance pool, which improved management of claims and led to a more equitable pooling of losses among insurers. The rise in the premium rates of third-party insurance for commercial vehicles seen in the last few years was needed as claims from this particular segment were increasing.
Moreover, in November last year the regulator in a notification to all non-life insurers increased the provisioning to 210% of claims from 140%. Non-life insurance companies will have to provide around R400 crore as additional capital. The hike in provisioning will impact the solvency ratio of some insurers, who may need additional capital. The increase in provisioning further burdened non-life insurers as third-party motor insurance is a bleeding portfolio due to higher claims from commercial vehicles. The rates are fixed by the insurance regulator and, due to the high claims ratio of commercial vehicles, insurers provide them cover from the declined pool and not from their own books. The size of the declined pool is around R210 crore.
As per the motor vehicles law, third-party cover is unlimited in case of an accident and the entire compensation has to be paid by the insurer. In case of damage to property, the claim amount can be a maximum of R7.5 lakh. Moreover, litigation related to the claim amount can go on for years. A study by Irda on the claim development pattern of goods and passenger vehicles shows it takes eight years for 99% claims to be filed.
Sanjay Datta, chief of underwriting and claims, ICICI Lombard, says the uncertainty of third-party claims getting reported on time increases the volatility around the claims payable. Among the steps required in reviewing the third-party claims, it is important to introduce a limit on the amount of claim and the permissible time to report a third-party claim. The current framework of rewarding unlimited claim amount for cases, such as death of a third-party and no time limit on reporting, has a big impact on the loss and, hence, the premium.
Before 2007, premiums for all of non-life sector were regulated by the Tariff Advisory Committee. While the regulation of tariffs was withdrawn, it continued for third-party insurance, which saw insurers suffer huge losses. Irda says these premiums represent under 1% of transporters operating costs.
Sanjay Datta of ICICI Lombard elaborates that the insurance department is working with government departments to change certain laws, such as the limit on the amount of claims and the permissible time to report a third-party claim. We also need to work closely to ensure there is enforcement by the government for vehicle-owners to get covered for third-party motor insurance, he underlines.