Third party vehicle premium to be market-driven: IRDA

The Indian insurance regulator plans to take the first step in two or three months to abolish the administrative pricing mechanism (APM) for third-party vehicle premium and make this market-driven, a senior official said.

"We will come out with the road map for de-tariffing (abolishing the APM) the third party premium in two or three months' time. The Declined Risks Pool will be two-years-old by that time. We will be able to study the loss trends and the kind of vehicles that come into to the pool," M. Ramaprasad, member (Non-Life), Insurance Regulatory Development Authority (IRDA), told IANS over the phone from Hyderabad.

Commercial vehicles that have been denied third party insurance cover by general insurers for varying reasons are provided cover under the Declined Risk Pool.

In India all vehicles should at least have third party insurance cover. Insurers offer two types of covers - comprehensive and third party. The comprehensive policy covers damage to the vehicles due to an accident and liability arising from damage to third parties (first party is the insured, second party is the insured and others are third party).

Demands have been raised for de-tariffing the third party insurance premium as the APM and a free-market economy do not go together.

"Insurers seem to have a vested interest in having the third party premium under the APM as they can go on demanding premium hikes. Like all other classes of business, if the rates are freed, then third party premium rates would also fall due to competition," K.K.Srinivasan, former member at IRDA, told IANS over the phone from Bangalore.

He said if at all there is an APM, it should only be for vehicles in the Declined Risk Pool.

"De-tariffing the third party premium is necessary so that good customers get the benefits of lower premiums. The current tariff regime is cross-subsidising the bad customers with uniform pricing for both good and bad customers," Amarnath Ananthanarayanan, managing director and chief executive officer, Bharti Axa General Insurance Company Ltd, told IANS.

"As an insurance company we would like to have the flexibility of pricing for third party as well and do not see the tariff as a way of providing us with a minimal threshold for pricing. If we are talking of detariffing then we should also do away with the Declined pool," he added.

Speaking to IANS R.Chandrasekaran, secretaray general, General Insurance Council said: "Detariff regime would work well if there is a statutory cap on the compensation payable to road accident victims. Insurers can offer a separate cover for vehicle owners who want to protect themselves against higher liability."

Currently, there is no statutory cap on the compensation to be paid to a road accident victim and the cover under the third party policy is unlimited.

Industry officials told IANS that courts are now awarding increased compensation for road accident victims factoring aspects like loss of earning potential, average monthly interest income from the award and others.

Though theoretically the liability is unlimited, as per IRDA's figures, the average size of death claims under the third party policy is Rs.386,713 for 2012-13 - an increase of around 27 percent over the previous year.

"The average claims size shows that there are claimants who get less than that," said an industry official.

Meanwhile the IRDA Feb 11 proposed to revise the third party premiums for all vehicle categories.

Interestingly IRDA has proposed reduction or a moderate hike for most of the goods carrying vehicles - the most vocal and organised segment. The hike is steep only in the case of trucks with a carrying capacity of over 40 tonnes.

On the other hand, IRDA has proposed a premium hike up to 137 percent for private cars and 45 percent for two-wheelers - the most unorganised and voiceless segment.

While IRDA has factored fixed and variable costs and loss trend while arriving at the new rates, it has not taken into account the investment income to be earned by the insurers on the premium earned under this portfolio.

"The methodology of arriving at the new rates is one-sided and faulty. While claims and direct and indirect expenses are taken into account in determining the new rates, the omission to consider investment income is glaring. If investment income is taken into account the rate hike will be lower," Srinivasan said.

Officials estimate the motor insurance portfolio for the industry this fiscal would be around Rs.30,000 crore (Rs.300 billion/$5 billion).

The third party premium component would be around Rs.9,000 crore that would fetch a handsome investment income as a claim would take around five years to get settled.