Third-party motor insurance premium hike delay worries insurers

Next six months will be tough for the industry in terms of loss ratios

Non-life insurers are facing a double whammy. While health claims due to coronavirus (Covid-19) are rising fast, the claims from motor segment have also picked up. 

Another big worry is hike in the third-party motor insurance premium — supposed to have kicked in from April 1 — that was put on hold by the Insurance Regulatory and Development Authority (Irdai). 

There is no clarity if the regulator will hike third-party rates this year. Insurers claim this may result in a negative impact on loss ratio for them in the motor segment.

“The price increase proposed in the exposure draft was based on data that was available to the committee. So, it’s based on past information. That was an increase we needed to cover the price gap. If it doesn’t come through soon, it will have some negative impact on the industry. We are hopeful that it comes through,” said the chief executive officer (CEO) of a private sector insurance company.

The Irdai, in an exposure draft, had proposed third party premium hikes for FY21. But it soon put the proposed hike on hold, given the spread of the virus and the economic impact. It was done to give some relief to policyholders due to the pandemic.

When the rate increase was proposed, it was based on data of the previous year. Now, the current context has to be brought in and the regulator has to see whether the rate hike it had proposed in the draft should be done now or later, said experts.

“The compensation of third party depend on the court awards. Generally, we have seen a 12.5-15 per cent inflation in the awards given by courts. Hence, if the premiums do not go up and the awards increase, then it will create a gap. As a result, the industry will see higher loss ratios. So, it is very likely that the loss ratios will aggravate,” said Rakesh Jain, CEO, Reliance General Insurance.

“Even last year, hike in third party premium was deferred by three months. So, whatever hike we got last year was for nine months and this year we have not got any hike as of now,” Jain added.

Initially, during April and May, when the country was under rigorous lockdown, motor segment claims fell significantly. But, claims started moving up in the motor segment with lockdown being gradually eased. On the revenue side, renewals have picked up. 

Slowly, new car sales are also picking up but are not where they were earlier. So, loss ratio will depend on a lot of things. At the moment, IRDAI will have to take a view on when it wants to allow the rate hike in motor third party premiums, industry experts said.

“On an overall level, it looks like April and May have been silent months, as there were hardly any claims in the motor insurance segment. But from June, the claim numbers have seen an uptick. I don’t think IRDAI will increase third party premium rates this year given that the claim figures in the motor segment fell due to the lockdown,” said Sajja Praveen Chowdary, motor business head, Policybazaar.com

“The own damage claims are now 80-90 per cent of what they used to be. And, average claim size is increasing. So, the claims outgo is more or less equal to what it used to be. But revenue is falling. Next six months will be tough in terms of loss ratios for the industry,” Jain added.