Motor insurance: Making third-party cover more equitable

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May 4, 2020 3:30 AM

The motor third-party obligation of each insurer should be linked to the number of vehicles insured instead of premium derived from this segment, says Irdai panel.

The panel has also suggested that any new player licensed to underwrite motor insurance for the first time may be exempted from the obligatory requirement during the first two financial years of its operation.

In order to make the motor third-party (MTP) insurance formula for calculating the obligation of insurers flexible and equitable, the insurance regulator has suggested that the mandatory cover should be a function of number of vehicles insured or uninsured and not of premium derived from the MTP insurance business.

The panel has also suggested that any new player licensed to underwrite motor insurance for the first time may be exempted from the obligatory requirement during the first two financial years of its operation. At present, all non-life insuers have to underwrite MTP covers.

According to the Insurance Regulatory and Development Authority of India (Irdai), the need for review of the existing system of MTP arises because in the present system the current MTP obligation is not known to the insurers in advance, as the audited data required for the formula is not available till the middle of the financial year. Experts say a standard formula is needed which will help insurers to self-assess their obligation at any point in time in the year without any regulatory intervention. Also, an increase in the number of insured vehicles could bring down the rates as the risk pool becomes larger.

Present system of third-party obligation

At present, the prevailing annual MTP obligation of the insurers is based on the quantum of premium collected by the insurers on any given year out of motor third-party business. The Irdai panel notes that the premium collected by the insurers out of motor third-party business is neither representative of the market penetration of motor third party insurance nor to drive the impetus for increasing penetration. The MTP obligations are not known to the general insurers until middle of the financial year, making it difficult for insurers to plan their obligations well in advance. Every year, the regulator fixes the MTP rates. It analyses the claims paid in each year and the gross written premiums.

As the premium difference between vehicle segments is very high, collection of larger premium does not necessarily represent insurance of more vehicles. As a result, two-wheelers which form the bulk of vehicles plying in the country could not be brought into the insurance net.

A report by Insurance Information Bureau of India (IIBI) shows that out of around 22 crore vehicles plying on the road as on March 31 last year, the percentage of uninsured vehicles is nearly 58%. These are mostly two-wheelers, which account for 70% of the total vehicles in the country. While most private cars are insured, around 45% of commercial vehicles are not insured. The risks of accidents are high for both two-wheelers and commercial vehicles.

Mandatory cover and claims
Under the Motor Vehicles Act, any vehicle that plys on the road needs mandatory MTP cover. The 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. The reported claims frequency is the highest for the goods carrying segment, followed by passenger vehicles and private cars.

Way ahead
The regulator’s working report says that all vital ratios of the government with respect to monitoring motor vehicles are in terms of the count of the vehicles such as vehicular population and vehicular density. The report notes that that is a natural tendency on the part of insurers to pursue the class of vehicles which is profitable. As a result, the class of vehicles with lower premium size or those with higher loss behaviour is left neglected and leads to an imbalance in the distribution of risk among the insurers. Experts say the new formula will help in increasing vehicle insurance penetration and help insurers to have a well-set-out plan for MTP obligations in advance.

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