Irdai has proposed a steep hike in third-party motor insurance premium for private cars from April
The mandatory third-party motor insurance premium rates are set to increase from the next month, with the steepest hike likely for private cars. The increase for two-wheelers and some segments of commercial vehicles may be marginal.
The exposure draft of Insurance Regulatory and Development Authority of India (Irdai) has proposed to more than double the rate of the liability cover for private cars below 1,000cc to R2,346 from R1,129. For cars between 1,000 cc and 1,500 cc, the proposed increase is 44% and, for cars above 1,500 cc, the rise could be 29%.
The mandatory cover for two-wheelers is expected to rise about 16% for those in the 75 cc to 150 cc category, which accounts for the bulk of the two-wheeler sales in the country. The third-party cover for two-wheelers below 75 cc would likely increase by 14%, while, for those between 150 and 350 cc, the proposed hike is almost 32%. Interestingly, the third-party cover for two-wheelers above 350 cc would see a 61% drop in rates.
The hike, if effected, would be the fifth in five years. The regulator’s March 9 draft exposure said: “It is observed that there is a high increase in average death claim for 2013-14 over the previous year, and the increase in average death claim size for the claims arising out of the policies issued in the year 2014-15 and 2015-16 (which would get settled over the next 8-10 years period) is expected to be much higher.”
Data from Insurance Information Bureau show that the average third-party liability claims (death only) in FY14 was R6,09,152 against R5,45,174 crore in FY13 and the number of claims rose to 38,461 from 36,546 during the same period. Motor insurance continues to be the largest segment for non-life insurers supported by the mandatory insurance requirement. Motor insurance comprises own-damage and third-party insurance.
The final rates, however, will be put out by the regulator towards the end of this month as it has sought comments from stakeholders on the draft exposure by March 20.
The final rates applicable from April last year were much less than the ones proposed in the draft exposure. For instance, in April 2014, the third-party premium rate for cars below 1,000 cc increased 20% against the proposed increase of 137%. For cars between 1,000 cc and 1,500 cc, the rate increased 20% against a proposed 50%. Similarly, for two-wheelers, the mandatory cover increased just 10%.
Any vehicle that plies on the road needs a third-party cover under the Motor Vehicles Act.
Insurers need to ensure that the cover is available at their underwriting offices. To arrive at the new third-party motor premium in April, Irdai had used data available with Insurance Information Bureau for the experience period of the underwriting years 2007-08 to 2013-14 for number of policies, number of claims reported and amount of claims paid up to March 31, 2014. The analysis made use of the combined data — all claims paid in respect of all causes of loss.
The regulator’s note said the calculation relies on the basic assumption that the past is indicative of the future and that the future development of claims is similar to that experience in the past.
Third-party liability is decided and awarded by the judiciary taking into account the age of deceased, earning capacity, wages, etc., which keep rising due to inflation and other factors.
Based on these parameters, the regulator had put in place a formula in 2011 to calculate the pricing annually.
As per the motor vehicles law, the third-party cover is unlimited in the 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. An analysis done by Irdai on the claim development pattern of goods vehicles and passenger vehicles shows that it takes eight years for 99% of the claims to be filed.
Prior to 2007, premiums for all non-life sector were regulated by the Tariff Advisory Committee. While regulation of tariffs was withdrawn, it continued in the case of third-party motor insurance, which saw insurers suffering heavy losses. In April 2012, the regulator placed third-party insurance under the declined risk insurance pool, which improved claims-management and resulted in more equitable pooling of losses among companies.