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Home >Opinion >Third-party claims: hurdles on the road to profitability

Motor insurance is the most visible form of non-life insurance and also one of the major contributors to a general insurer’s premium income. Motor insurance comprises of two parts—third-party liability (TP), which is mandatory as per the Motor Vehicles Act, and the other is own damage (OD) section. In 2007, when motor insurance was de-tariffed, insurers were allowed pricing freedom only in the OD part; the TP liability part is still regulated and the regulator announces the rates valid for the year.

In any line of insurance business, if satisfactory service has to be provided, then that line has to be profitable. For this, price has to be commensurate with the risk. You will be quite baffled and intrigued to note that the TP line is not profitable for many insurers.

Is this the genesis of a problem of inconsistent pricing that is draining the profitability in motor insurance? The answer is both yes and no. Yes, because the price in TP liability is not commensurate with the risk as this component is highly loss making. However, the pricing for the OD part stabilized after a few years with the emergence of several new variables such as fuel, pin code, driver’s profession, gender, etc. No, because premium is not the only reason. There are critical anomalies in some of the concomitant laws that exist and the lethargy among the law enforcing authorities in its implementation.

TP liability insurance was set up for a noble motive of providing financial protection to a third party either for a person’s injury or death or damage to a property caused due to the insured vehicle. In case of a claim for property damage, the liability is limited up to 7.5 lakh. But there is no such limit in case of a person’s death or injury other than a formula for calculating the compensation as enshrined in the Motor Vehicles Act. This formula serves only as guidance because often, the claimant’s advocates plead for higher compensation, sometimes running into crores. The other factor that hampers natural justice to the victims is the growing number of frauds orchestrated by some elements in the legal and medical fraternity, and others. Their collusion is evident in bizarre claims, such as a claim for an accident from a “non-existing" vehicle, “omnipresent" witnesses in road accident cases, natural death being passed off as road traffic accident, claims by “ambulance chasers" who track road accident deaths in the vicinity of government hospitals, doctors providing fake disability certificate, etc.

These invisible but conspicuous factors do impact the TP premium. Nonetheless, an effort has been made to review the TP rates every year and linking it to the inflation and past claim history. But that is not sufficient.

In order to have a robust TP portfolio and provide financial protection to deserving claimants, I strongly feel that there is an urgent need for changes in certain rules. First, TP premiums should also be brought into the free pricing regime so that insurers can price it better and reward good drivers, as is happening in OD part. This will be a better solution than raising it every year. Hiking premiums every year may end up in getting into a vicious circle as higher premiums take people away from insuring their vehicles and subsequently add to the growing number of uninsured vehicles. Second, there should be a cap on liability on TP death claims similar to the one prevailing in aviation or railway accidents. This can substantially lower the claims ratio. The other big issue is the time limit in filing TP claims. Today, anybody can file a claim irrespective of the date of the accident. We have seen claims filed 8 or 9 years after an accident. Our experience shows that the longer the time taken to file the claim, the more is the chance of it being fraudulent. The time limit to file a claim should be restricted to 2 years or less. Last but not the least, collusion among fringe elements in the police, legal and medical fraternity needs to be curbed to prevent fraudulent claims.

Many companies have initiated several legal actions against the concerned and hope that it will be a deterrent to others. Stakeholders should also be educated on the importance of TP claims and its processes so that the deserving claimants are able to get the benefits.

Tapan Singhel is managing director and chief executive officer, Bajaj Allianz General Insurance Co. Ltd.

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