Be prepared to spend more on your automobile insurance covers. The Insurance Regulatory and Development Authority (Irda) is set to replace the current commercial third-party motor pool with a 'declined pool', which would, in a way, free prices and enable insurers to implement a risk-based pricing model.
Under the new arrangement, expected to start from April 2012, insurers would have the right to refuse or 'decline' a vehicle insurance and these vehicles would be insured from the pool shared by insurers. Under the existing system, all commercial third-party premiums are pooled and losses on account of the commercial third-party motor portfolio are shared among all general insurance players, according to their market shares.
Irda Chairman J Hari Nayaran confirmed the development, saying, “The current pool is an unstable structure; we have to reform it. The pool was started to address demand-supply mismatches, but we need to restructure it.”
However, to avoid 'cherry picking', insurers would be allowed to decline risks only on the basis of parameters like claim experience and frequency of accidents. Irda may also introduce priority segments, under which each company would be required to underwrite a minimum number of policies in commercial vehicle and truck segments, said a source. For the rest of the vehicles, insurers would be free to underwrite risks independently. This means a deferential pricing system, based on the claim experience, age and frequency of the accidents, would evolve.
“This would allow insurers to price their products according to segments. They would also have the flexibility to focus on a certain category,” said a senior official at a private general insurance company. Since losses would be recorded in respective books, it would make the industry more efficient. Also, as risks would be priced accordingly, premium rates would go up, he added.
According to industry experts, to make up for existing losses, third-party premiums are expected to go up by 50-120 per cent across various categories.
The motor portfolio, which accounts for 43 per cent of 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, which means for every Rs 100 collected as premium, the claim paid is Rs 150.
While private general insurers were lobbying for dismantling the pool, the four state-owned players, The New India Assurance Company, Oriental Insurance Company, National Insurance Company and United India Insurance Company, which together control 59 per cent market share, were against it. “Public sector players have a misplaced concern of losing money once the pool is dismantled. We are in dialogue with them and are trying to make them understand this would benefit them,” Narayan added.
Total premiums collected by the general insurance companies stood at around Rs 44,000 crore during 2010-11, Rs 18,000 crore of which was accounted for by motor premiums. Typically, third-party liability accounts for 35 per cent of total motor premiums. The industry took a hit of Rs 10,250 crore last year on account of commercial third-party motor pool losses.
