In April this year, the Insurance Regulatory and Development Authority (IRDA) raised premiums for motor third-party liability insurance by up to 68%, but that hasn’t made non-life insurance companies happy. The reason: third-party motor insurance is a bleeding portfolio and all insurers are stung since the losses are divided among all owing to the third-party motor pool.
For these reasons, insurers have been lobbying hard to get the third-party insurance pool dismantled and are also demanding de-tariffing or a free hand in pricing the cover. However, there are regulatory concerns around the issue.
Defining motor third-party liability insurance?
This cover protects you from any financial liability in case your vehicle causes any damage to life or property of a third person.
According to section 146 of the Motor Vehicles Act, 1988, any vehicle that plies on the road needs a third-party cover. In case of an accident that causes bodily injury or loss of life, the third-party cover is unlimited. The compensation amount is borne by the insurance company. It is decided by the court, which usually takes into consideration the earning capacity and age of the injured/deceased person. In case of damage to property, the maximum liability is limited to Rs 7.5 lakh.
Though the regulatorde-tariffed motor insurance in 2007, it retained control over the third-party motor insurance portfolio to ensure that the mandatory third-party cover didn’t get out of reach for transporters and other vehicle owners.
The main problem is the lack of balance between premiums and liability, which has led to an adverse claims ratio, especially with regard to commercial vehicles. Claims ratio is the ratio of premium earned to the claims incurred.
Another area of concern is the third-party motor pool comprising all motor third-party premiums collected by non-life insurers for commercial transport. It is from this pool that claims are paid at present. But the claims are paid in the ratio of an insurer's market share.
Take the example where the premium collected by the pool is R1 lakh, whereas the claims incurred is R1.5 lakh in a given year. Now company A which has an overall marketshare of, say, 10% will get Rs 10,000 from the pool as premium income but will have to shell out R15,000 as claim amount. In other words, regardless of how many policies company A would have underwritten, it will have to incur a loss of Rs 5,000.
Impact on consumers
Even as the industry is struggling to find ways to instill better claims management and to get some pricing respite, de-tariffing is not something the regulator is considering right now. But in order to achieve some balance between price and liability, you may need to pay higher premiums in the future.
However, freewheeling is not really on the cards. “You can't have unacceptably high premiums on third-party cover because one needs to maintain a balance between commercial interest and insurance needs,” said J Hari Narayan, chairman, IRDA.