From 1 April, get ready to pay a higher premium on your third-party motor cover. The Insurance Regulatory and Development Authority (Irda) has increased the premiums for third-party covers for all categories of vehicles—private and commercial.
However, if you own a private car or a two-wheeler the pinch may not be so much. The increase in premium is around 4-8%. But if you own a fleet of commercial vehicles such as trucks or have a taxi service, get ready to shell out a significantly higher premium. In case of commercial vehicles, this increase is upto 32%.
The increase in premiums this year has been lower compared with last year’s hike: in case of commercial vehicles, the increase was around 68% and for private vehicles, it was 10%.
But the future has in store higher premiums even for other components of comprehensive car insurance cover, namely own-damage that covers theft or damage to your vehicle and passenger cover. The annual review of premiums in case of third-party cover and a declined risk pool may push the premiums up.
Annual review of third-party covers
Last year, in order to bring some parity between third-party premiums and the amount of claims, the regulator decided to look at pricing of third-party cover every year. Third-party premiums still remain under tariff but the regulator will arrive at the premium on a yearly basis on the basis of three parameters: average claims for each class of vehicle, frequency of claims for each class of vehicle and cost of inflation index for the year of review.
Illustration by Shyamal Banerjee/graphic by Ahmed Raza Khan/Mint
According to the regulator, this year there has been no change in the frequency of claims but there is an upward trend in court awards, wages and inflation.
What is third-party cover? 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 and 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.
The pool shift
But it is not the annual exercise alone that will push your premiums up. From next month, the third-party motor pool will be dismantled and instead a declined risk pool will be put in place. A dismantled third-party pool will mean insurers will need to tighten their belts as they would need to underwrite third-party business themselves instead of passing it off to the common pool. In other words, the insurers will have to become more responsible in claims management as they get ready to take on more risk.
Says K.N. Murali, vice-president and head (motor vertical), Bharti AXA General Insurance Co. Ltd: “Because of the pool, there was a casual attitude among insurers towards claims management. The losses were mounting and so the pool had to be dismantled.”
Third-party pool: Third-party motor cover till now operated out of a pool in case of commercial vehicles and all third-party claims were paid from this pool. For example, if the pool collected Rs 1 lakh in premiums and claims amounted to Rs 1.5 lakh, all the companies would have had to share the claims in proportion to their market share. So company A with an overall market share of, say, 10% would get Rs 10,000 from the pool as premium income but would have to shell out Rs 15,000 as claim amount—10% of the total premium income and total claim amount, respectively. Regardless of how many policies company A would have underwritten or sold, it will have to incur a total loss of Rs 5,000.
Last year, the total loss estimate of third-party motor pool was around Rs 8,000 crore.
Declined risk pool: This pool will be restricted to only a part of stand-alone third-party covers for commercial vehicles that the insurer thinks unviable to underwrite. This means each insurer will have to individually settle third-party claims that are a part of comprehensive motor insurance and a chunk of stand-alone policies. The rationale behind allowing only stand-alone third-party cover to the pool is because in the case of comprehensive policies, an insurer can stop cross-subsidizing by reducing discounts in other components of the comprehensive package.
At the same time, every insurer will be expected to meet their share of business. This share will depend on their market share and their share in motor insurance. At the end of each year, an insurer facing a shortfall in meeting the target will have to plug the gap from the pool. For example, if an insurer is supposed to do a business of, say, Rs 1 lakh a year, but has been able to do business worth only Rs 90,000, then the insurer will meet the shortfall by taking Rs 10,000 worth of business from the declined pool.
Says T.A. Ramalingam, head (underwriting), Bajaj Allianz General Insurance Co. Ltd: “Declined risk pool will have the worst business since it will comprise policies that have been rejected by individual insurers. So each insurer will try and meet its targets in order to avoid dipping into the pool and at the same time focus on better claims management.”
Effect on premiums
This is likely to affect premiums of other components of motor insurance as well. A comprehensive motor insurance policy includes own-damage as well as passenger insurance.
Says R.R. Belle, managing director and CEO, SBI General Insurance Co. Ltd: “As a result of dismantling the pool, the insurers will be taking more risk because now they will be retaining third-party business individually. Also, the losses of third-party pool will need to be settled by the insurer. This will put pressure on insurers to increase the price of other components of motor insurance cover.”
Own-damage and other components are not under tariff. So the insurer can alter the premiums, but the increase will vary from company to company. Says Gaurav D. Garg, managing director and CEO, Tata AIG General Insurance Co. Ltd: “It is likely that overall premiums may go up but it is not in the best interest of the insurers. A hike in comprehensive premium will force customers to stick to the mandatory third-party cover. The right thing to do would be to make third-party premiums in sync with losses in third-party motor. For this year, the loss ratio is 145% so a quick calculation indicates that third-party premiums need to increase at least by 40-45%.”
Also See | The Change (PDF)