Urgent steps needed to fix
Motor TP insurance
Motor Third party liability insurance or just liability insurance is to be taken by all motor vehicles as it is mandated by law. It covers for injuries or damages inflicted on a third person, a passenger in another vehicle or pedestrian, by the insured. Unlike a first party cover, where there is a limited sum that is to be given in cases of damage to the vehicle, in a third party cover the coverage is unlimited, especially if there is a serious damage or loss of life.
The motor portfolio, which accounts for about 43 per cent of the total premiums, has always been the Achilles Heel of general insurance companies in India, owing to inherent commercial-third party losses. The claims ratio is estimated at 150 per cent. This means for every Rs. 100 collected as premium, the claim paid is Rs. 150.
Total premiums collected by general insurance companies stood at around Rs. 44,000 crore in 2010-11. Of this, motor premiums accounted for Rs. 18,000 crore. Typically, third-party liability accounts for 35 per cent of total motor premiums. According to estimates, 28 per cent of all motor vehicles insured are commercial vehicles and these account for 78 per cent of the claims in terms of value.
Why an insurance pool was needed: To distribute the losses among insurers, the Indian Motor Third Party Insurance Pool was created in April 2007 for commercial vehicle third-party insurance businesses.
The share of each insurer was decided according to its overall market share of all lines of business.
The pool system was created by the insurance regulator, IRDA, under the belief that not many companies may be willing to underwrite for commercial vehicles, and also to prevent it from becoming too expensive for commercial vehicle owners. All the general insurers contributed to the third party motor pool based on their market share.
“The idea behind creation of the pool was the belief of non-availability of enough insurance for commercial vehicles. But now the situation has changed as all companies are underwriting commercial vehicles and there are no supply constraints. The pool is also becoming big and difficult to manage,” feels KG Krishnamurthy Rao, managing director and CEO, Future Generali India Insurance.
The problems: The provisioning for the pool was maintained at 126 per cent for the first three years of the system despite the requirement being 172 per cent in 2007-08, 181 per cent in 2008-09 and 194 per cent in 2009-10. This forced IRDA to increase the provisioning to 153 per cent in April this year for commercial vehicles, according to ‘India 2011 – insurance industry report’ by India First Risk Management and Brokerage services.
The size of the pool was Rs. 3,500 crore as on December 2010. Since the claims were higher, the pool ran a deficit and IRDA asked insurers to make an additional provision of Rs. 3,750 crore on account of motor pool losses of the past four years.
An IRDA study has revealed that some smaller non-life insurers were writing large amounts of commercial vehicle portfolio, retaining the profitable own damage component but ceding the loss-making third party portion into the pool and getting their share as “retrocession” from the pool. Retrocession here refers to what the smaller insurance companies are deriving in return from the pool as their share.
IRDA has said it will step in to stop smaller private general insurers from deriving undue arbitrage advantage from the motor third-party pool, which was resulting in huge losses for public sector firms and large private players.
Every insurer could write TP risks into the pool without rejecting any requests and the liability arising out of all such policies will be borne by the pool. The insurers were asked to share the liability in proportion to their overall market share.
Of the total gross premium of Rs. 42,594 crore during 2010-11, the four public sector insurers had 58.9% share with the balance shared by the 12 private general insurers.
Of this, the total motor premium accounted for ` 16,872 crore, with PSUs’ share at 45.6% and private insurers 54.4%. The regulator also observed that the PSU share in the profitable motor OD premium business (Rs. 10,770 crore in 2010-11) dropped to a low of 38.9% while private insurers had 61.1% share.
When it came to the loss-making motor third-party other than TP pool business of Rs. 2,582 crore, PSUs once again had a dominant market share of 57.4% while the private insurers exposure was 42.6%.
In the third party-pool-only premium of Rs. 3,519 crore, PSUs had 57.5% share and private insurers 42.5%.
Within this, certain smaller players underwrote four to five times more than their market share. The IRDA study pointed out that these smaller private general insurers had significantly hiked their market share in motor premium, both OD and TP, compared to their overall market share, indicating undue advantage they were deriving, detrimental to the interests of PSUs as well as certain large private insurers.
What the IRDA says: The IRDA chairman, J Hari Narayan, recently hinted that the provisioning done by many companies towards the motor pool was low and the gap between provisioning and losses should be bridged. An independent actuarial report done at the behest of the regulator also suggested that the provisioning should be hiked to 175-200 per cent.
Motor TP Pool provisioning has developed into an ugly spat between IRDA and a clutch of general insurance companies. Third-party insurance pool’s half-yearly balance sheet shows a loss of Rs. 3,488 crore. To meet this gap, the companies, including ICICI Lombard General Insurance, Tata Aig General Insurance, HDFC ERGO General Insurance and Reliance General Insurance, have to raise fresh capital.
But IRDA has challenged the basis of the calculation, throwing into disarray the finalisation of the half yearly balance sheet of the pool.
IRDA, has accused the motor pool managed by GIC Re of discrepancy, which, it says, is because it has adopted incorrect accounting methods, including provisioning. The regulator has sought an explanation from the motor pool on the discrepancy between audited figures and the figures that were sent to IRDA.
IRDA decided to clarify the matter with motor pool officials after it detected two set of figures with regard to the premium and claims of the motor pool in a gap of one month.
The motor pool has prepared its half-year balance on the basis of a 172% provisioning for the entire third-party motor business, thereby showing the massive losses of Rs. 3,488 crore. The losses for 2010-11 (March 2010 to February 2011) were Rs. 3,612.57 crores.
As a result of these losses, the general insures have to bring in a great deal of capital to remain solvent.
The general insurers have protested the move by the motor pool to increase the provisioning from the existing 153% to 172.25% of their own as this is the second time in six months the promoters have infuse capital to keep the company running.
The general insurers — ICICI Lombard General Insurance, Tata Aig General Insurance, HDFC ERGO General Insurance, Reliance General Insurance, Royal Sundaram Alliance — have reasons to protest about further hiking the provisioning on the third-party motor portfolio as almost all their promoters like ICICI Bank, HDFC, Tata Sons, Bajaj Finserv, IFFICO, Reliance Capital, Sundaram Finance are listed companies and may get hit in the capital markets.
However the motor pool official has justified the move to increase the provisioning base, saying that ultimate loss ratio (ULR) of 153%, which was decided by the IRDA, was meant for 2010-11 and the pool was free to adopt the new provisioning base.
General Insurance Council (GIC), the official body of general insurance companies and the IRDA are discussing the issue in order to find a way out of the imbriligio.
What the industry says: Due to the higher provisioning, almost all non-life insurers posted losses and the overall industry loss was pegged at Rs. 728 crore for FY2010-11.
According to Bhargav Dasgupta, CEO, ICICI Lombard General Insurance Company “the fundamental problem with the entire pool is three-fold. One, the under-pricing of that risk — even the 68.5 per cent rise last year was not adequate. Second, the pool has outlived its purpose and is actually becoming a drag for the industry. The third issue is the Motor Vehicles Act, which needs to be amended. The Act says claims can be unlimited, and can be filed anytime. Both these clauses need to be capped, since at the end of the day, a delay in the claim intimation leads to frauds.
One of the things happening with the pool structure is there is a lack of ownership, which is leading to inadequate focus on proper claim management and fraud control. Solutions are being discussed — either a dismantled or a declined pool mechanism would be a step in the right direction.
I am sure IRDA would come out with a scheme that meets all stakeholders’ objectives in a fair and equitable manner”.
“A higher provisioning should be compensated by a higher premium. We hope that the regulator considers a commensurate increase in premium also,” says SS Gopala Rathnam, managing director, Chola MS General Insurance.
The industry members have also been asking for a reduction in solvency ratio (the surplus of assets over liabilities of a company, which acts as a safety margin). The last time that IRDA raised provisioning from 126 per cent to 153 per cent, the solvency ratio was also reduced from 1.5 times to 1.3 times. Now, if the provisioning is further raised to 175 or 200 per cent, the industry members also want the solvency ratio to be brought down to 1.1.
The way out: IRDA has formed a sub-committee to examine the issue of reforms in the third party motor pool following a meeting with the general insurers and general insurance council to convince them on the need to dismantle the motor pool.
The committee, which has representatives of both private and public sector general insurers, has been asked to submit its recommendations within a week.
When asked about the regulator’s view, J. Hari Narayan, said that the motor pool should go.
“I am convinced that dismantling of the pool will be in the interest of all the stakeholders — the industry and the policyholders.”
“The present mechanism is diluting the responsibility of the insurers and causing unnecessary losses to some players.
This has to be rectified but some have reservations on this issue,’’ Hari Narayan said. Some small players were ‘irresponsibly’ writing the losses to the pool which is causing a loss to the public sector companies as well as big private players. According to IRDA data, the expected ultimate loss for the third-party pool had gone up from Rs. 5,271 crore to Rs. 7,493 crore in 2010-11. “Finally, the logic should prevail in any decisions hence the pool has to go,’’ the IRDA chief said.
IRDA now plans to go in for a “declined pool” at the earliest that will eliminate arbitraging, fix responsibility in terms of insurers businesses to be written, and allow insurers to compete on comprehensive policies. It said these changes would benefit PSUs as the proposed declined pool mandates each insurer to write the TP (Act only) business as specified.
IRDA executive director A Giridhar said, “The cost of insurance will not go up for policyholders and the new regulations will ensure that no insurer rejects writing policies, including third party insurance cover.”
Making Motor TP Cover viable: There would soon be a separate Motor Vehicles Insurance Act (MVIA) that will do away with the controversial “unlimited liability” clause applicable in the current Motor Vehicles Act, 1988 (MVA). All the insurance-related provisions including insurance of motor vehicles, payment of compensation, and commissions would be deleted from the MVA and incorporated into the new Act which would be formulated and later administered by the Ministry of Finance.
The new Act is likely to limit the liability of the insurer in the third party claims and ensure that the cases are disposed off within two years.
The Ministry of Road Transport and Highways had appointed a committee under a former bureaucrat S Sundar to review the current MVA. The committee which submitted its report in January 2011 had recommended the ministry enactment of a separate Bill called Motor Vehicles Insurance Act to be formulated and administered by the Ministry of Finance.
The recommendations were accepted by the ministry and a letter sent to the Ministry of Finance requesting to initiate action for the enactment of a “suitable legislation to provide for MV Insurance Act”. The Ministry of Finance has decided that a legislation would be formulated for the MV Insurance Act by the Department of Financial Services and has constituted a committee to this effect.
The committee is chaired by the R K Kaul, CMD, Oriental Insurance Company. Representatives from General Insurance Council, Insurance and Regulatory Development Authority, Ministry of Road Transport and Highways and other legal experts would be part of the committee. The committee is likely to furnish its inputs by December 14.
The new Act is likely to incorporate several new provisions like doing away with the unlimited liability in the third party motor insurance claims. “There is no other country except some Scandinavian countries that still follow the unlimited liability clause,” said a senior finance ministry official.
“Several of the current provisions make the motor insurance business unviable for the insurers. The premium administered by the government is not enough. Plus a complainant can file a claim anywhere in India which increases the cost for the insurer,” said G Sreenivasan, CMD, United India Insurance.
According to an estimate, the total motor insurance claims liability in the country is over Rs. 17,000 crore. The new Act would introduce several new provisions. “There should be a cap of Rs. 10 lakh on the ‘no-fault principle’ and Rs. 20 lakh on the ‘fault principle’,” the Sundar committee had noted. The third party claims are known to take several years to get finally settled.
To address this issue committee has recommended that the Motor Accident Appellate Tribunal (MACT) and civil court must endeavor to dispose off a case within two years from date of filing and not to grant adjournments unless sufficient cause and reasons of adjournments have been recorded in writing.
There is likely to be provision for interim compensation of Rs. 1 lakh in case of death or permanent total disablement and Rs. 50,000 in case of permanent partial disablement, resulting from loss of a limb or sight of either eye or grievous hurt leading to such disablement to the victim within three months from the date of Filing of application
The rate of interest on the amount of compensation be linked to 200 basis points above the bank rate as notified by the Reserve Bank of India to introduce certainty and uniformity regarding the interest on amount payable as compensation. The Act would enable the insurer to make an endeavor to settle the claims out of court/Tribunal directly with the claimant by mutual consent.
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