Third-party premiums for motor insurance are tariffed currently and it is common knowledge that third-party portfolio is a bleeding one. Why so?
Even historically the premiums for third party have been inadequate to meet losses or claims. So in 2007 when the industry got detariffed, the regulator proposed to hike the premium by about 90%. However, strong lobbies and political pressure did not let that happen. The premiums increased but were still not able to meet the loss due to claims.
Since premiums are under tariff, one can’t increase the premium at will but the claims are very high. Third-party claims happen by award of courts, so the CPI (Consumer Price Index) or wages in a state determine the claim that we need to pay out. We know that wages and the CPI have only been increasing but the premium that we are allowed to charge remains constant, hence the pressure. It became very difficult, especially for private firms, to underwrite third party because of adverse claim ratios.
But to circumvent the problem, a third-party pool was created. That didn’t help.
The third-party insurance pool was created by the regulator (Insurance Regulatory and Development Authority, or Irda) to ensure that all the clients are able to get insurance cover for their commercial vehicles. Third-party insurance premium is tariffed. While insuring a commercial vehicle, each insurer collects the third-party premium and it is ceded to a pool which is administered by General Insurance Corp. of India. The loss of the pool is shared by all non-life insurers in the proportion of their overall market share. This sharing is in accordance with the decision of the regulator as this ensures that even companies that are not doing motor business participate in sharing the loss. But the problem is that say RS100 comes to pool, the loss mount to Rs150.
In January, the regulator set up a committee to look into the pricing of motor third-party premium. What has been the progress so far?
The committee is still discussing with various stakeholders and so the regulator is yet to finalize the rates. However, we feel that the new rates will be effective from April. However, the only thing one needs to keep in mind is whether the hike in premiums will be able to sustain the claims or not since claims are increasing but premiums don’t increase proportionately.
Irda has allowed you to bring down your solvency margin so that you can augment reserves. In fact, Irda has also discouraged incentives, bonuses and increments to top-level management and dividends to shareholders without prior permission.
Last year, the projected loss ratio was around 127% as per the actuarial working of the motor pool. As per the working of the actuary of Irda, the projected loss ratio for this year is 194%. This means if the premium is Rs100 then we are paying Rs194 as claims. As per regulation, insurance companies are to maintain a solvency ratio of 150%. If the loss is more, to maintain solvency the insurance company has to bring in capital. The projected loss ratio of 194% for the pool puts a lot of pressure on the solvency ratios for many insurance companies.
This year the motor pool premium could be around Rs3,500 crore; at 194% loss ratio, the total claim provision would be around Rs6,800 crore. This means a deficit of around Rs3,300 crore will have to be made up by all the insurance companies participating in the pool. Irda has addressed this problem by allowing companies an option of lowering the solvency ratio for this year to 130% and slowly increasing it so that in four years we are able to revert to 150% solvency ratio. As far as bonuses and incentives are concerned, the idea even here is to contain expenses.
The fear is that if third-party premiums are de-tariffed, it will lead to unbridled pricing, which means premiums will become unaffordable. Detariffing could mean trouble for the policyholders.
Not really. It is not as if an insurer can increase the price without justifying the reason for the increase. In 2006, Irda initiated the “file and use” guidelines under which along with the product feature, insurers are also expected to file the pricing of the product. We also need to justify the rates for the long term. In fact, Irda has mandated an actuary for each insurer at the time of pricing the policy to ensure that pricing is sustainable and justifiable.
So by how much do you think the premiums should increase?
In the commercial space, the loss ratio is about 194% and add to that 30-40% as management expenses. We need to increase the premiums by about 120% in the commercial space and 30-40% in the private space.
K.G. Krishnamoorthy Rao, Managing director and CEO, Future Generali India Insurance Co. Ltd