 "Motor insurance combined ratios may touch 200% by end of FY15")
The combined ratio for motor insurance might touch 200 per cent by the end of March 31, 2015 on the back of higher claims and subdued growth in the third-party (TP) segment. According to general insurance company executives, even though the overall motor cover prices might go up, it will not be able to compensate for the underwriting losses and higher combined ratio. A combined ratio below 100 per cent indicates an insurer is profitable.
This ratio is the sum of incurred losses and operating expenses, measured as a percentage of earned premium. It is a measurement of profitability
The Insurance Regulatory and Development Authority (Irda) had recently decided to limit the third-party premium hike in motor insurance to 9-20 per cent, compared to a proposal of hikes in the range of 20-137 per cent.
According to Irda's directives, the private cars category will see a motor TP hike of 19 -20 per cent across different categories - below 1,000cc (Alto, Nano), 1,000-1,500cc and exceeding 1,500cc. Similarly, in the two-wheelers category, premiums in TP segment have been increased only by 9-10 per cent against the proposed 1-45 per cent rise across different categories of below 75cc, 75-150cc, 150-350cc and exceeding 350cc. These rates will be applicable from April 1, 2014.
"While the industry had sought a minimum of 60 per cent TP premium hike, we have not been given even one-third of what we demanded. It is really unfortunate, since our books stand to suffer. With the provisioning for the segment already increased, combined ratios will also go through the roof and could well exceed 180-190 per cent," said a senior executive of a private general insurance company.
General insurance companies incurred total claims of Rs 17,589.4 crore in the motor segment in 2012-13, according to data released by the Insurance Information Bureau of India (IIB). The total premium from the segment stood at Rs 28,460.3 crore.
Of the total claims, private cars accounted for Rs 7,506.2 crore, while the share of goods carrying vehicles was Rs 5,626.6 crore. The total number of claims stood at a staggering 6.4 million, while the total policies stood at 63.6 million. TP claims stood at Rs 9,177.3 crore, whereas 'own damage' claims were at Rs 8,412.1 crore.
Irda had also asked non-life players to increase mandatory provisioning from 110 per cent to 210 per cent, to safeguard against the risks in the declined risk pool.
In motor insurance, TP coverage including the liability of third-party during a motor accident is mandatory, while own damage (OD) motor insurance is not. However, experts said several vehicle owners prefer to take a comprehensive cover since it covers the risks of both self and third-party claims.
"While we are required to make higher provisions, the claims are on the rise, especially due to the fact that there is no cap on compensation in TP motor insurance," said the CEO of a private general insurance company.
In February, Irda in its exposure draft had proposed a steep rise in premiums for 2014-15. In the exposure draft on revision in premium rates for TP insurance coverage for 2014-15, released on Tuesday, Irda proposed an increase of 25-137 per cent for private cars and 1-45 per cent for two-wheelers.
General insurance executives had sent a representation to the regulator to consider an increase of 50-60 per cent in motor TP premiums, in view of the rise in loss ratios in the segment.
The commercial vehicle segment has been a constant cause of concern in the motor segment, due to which insurers have sought steep hikes in overall TP premiums. Even two years after the third-party motor pool for commercial vehicles was done away with, the woes of general insurers are far from over.
Combined ratios for the motor insurance segment stand at 140-150 per cent at present for the industry, owing to losses in the third-party motor segment.
According to industry estimates, there is a 15-20 per cent increase in the payouts made by insurance companies to individuals for motor third party-related accidents.
While the OD segment is de-tariffed, motor TP pricing is still regulated by Irda and revised on an annual basis. The authority considers factors such as cost inflation index notified by the Central Board of Direct Taxes and the claims experience of companies while deciding the premiums.
There is unlimited liability in motor TP policies. In other words, there is no limitation on the size of the claim.
Hence, there has been a steady rise in death claims year-on-year. The revised Motor Vehicles Act, which is yet to be tabled in Parliament, limits liability at Rs 10 lakh. According to insurers, this will help contain losses.