Rising third-party insurance premiums
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The Insurance Regulatory and Development Authority of India (Irdai) has proposed an increase of up to 50% in the third-party liability premiums of motor insurance. Revisiting the premiums is an annual exercise for the insurance industry. This is done mainly in an attempt to rein in the claims ratio, which is difficult to contain.
Claims ratio is the ratio of net claims to net premiums. So, the industry is currently paying more to settle third-party claims than what it is receiving for third-party insurance. And while the premiums go up each year, so do the claims.
Read on to know why it happens again and again and how it impacts you.
Irdai’s role in premium pricing
A motor insurance policy has two main components—third-party liability and own damage.
In India, it is mandatory for all registered motor vehicles to have insurance for third-party liability. The premium for this insurance is fixed by Irdai and is announced every year.
Premium paid towards this insurance does not cover damage to the vehicle or its owner. It only covers any liability arising from damage caused to a third party. The damage could be in the form of injury, death of an individual or damage to property in case of an accident.
The own damage part of motor insurance is optional and it covers damage to the insured vehicle in case of an accident. This is the part of insurance that also covers thefts. Premiums for this part of a motor insurance policy are not fixed by the regulator and insurers can price it as they see fit. This distinction may not be clear to some people because when they buy a motor insurance policy, the third party and own damage covers come bundled in it. Without knowing it, they actually pay premiums for both covers.
Increase in premium
The proposed hike in third-party premiums, when notified, will increase your overall motor insurance premium, if you have a car with an engine of over 1,000 cc or a two-wheeler with an engine of over 75 cc capacity.
For cars with 1,000 cc plus engines, the third-party premium would go up by 50%. For two-wheelers over 150 cc engines, the impact will be in excess of 40%. The premium for cars with engines below 1,000 cc capacity would not change this year.
For instance, the third-party premium for a Maruti Suzuki Swift bought in 2015, which has a 1,197 cc engine, is currently Rs2,387. When the higher premium is notified, this would go up by 49.98%, to Rs3,580; an increase of Rs1,193. However, for a Hyundai Eon bought in the same year, with its 814 cc engine, the third party premium would continue to be Rs2,205 in 2017-18 too.
We must remember that the Irdai proposal is not about premiums for own damage policies. “There is no reason for the own damage premiums to go up if the third-party premiums are going up. In fact, there is a counterpoint that probably because of an increase in third-party premiums, and the overall insurance cost going up, companies may have to lower the own damage premium so that they can keep the overall price reasonable,” said Puneet Sahni, head, product development, SBI General Insurance.
In fact, insurers keep revising own damage premiums from time to time. “It is very dynamic. In some cases, these rates fluctuate every 15 or 30 days,” said Indraneel Chatterjee, co-founder, RenewBuy.com, an online motor insurance broker. “On an average, the impact on total premiums (third party plus own damage) could be in the range of 30%,” Chatterjee added.
Why does it increase?
Irdai uses the gross premiums and claims paid data for the previous years to calculate the premium for a subsequent year. In case of third party insurance, the insurance company has unlimited liability in case of loss of life. There are many factors that impact it. “The amount of compensation that an insurance company has to pay in case of a third-party liability depends upon factors like the age, earning capacity, dependents of the victim, apart from aspects like minimum wage in different states,” Sahni said.
As the average income and earning capacity are increasing across the country, so is the average compensation paid by insurance companies for settling third-party liability cases, Sahni said. “The gap between the premiums and claims was very high. It is coming down, but it still remains,” he added.
While the premiums have grown over the years, they have not grown in proportion to the amounts that insurers have to pay to settle the claims, Chatterjee said.
“The premiums (collected) are still not good enough to cover their losses. This is not the last time that we will see an increase in third-party premium,” Chatterjee declared.