The ghost of commercial third-party motor pool losses is back to haunt general insurance companies. Based on an independent report by the actuary of UK government, the Insurance Regulatory and Development Authority (Irda) may increase the reserve or provisioning requirement for the third-party commercial motor portfolio of general insurance companies from 153 per cent to 175 per cent. If implemented, this would result in the industry taking a hit of '10,000 crore.
The timing could not have been worse. Just when the industry was beginning to recover from the '10,250-crore hit it took last year on account of commercial thirdparty motor pool losses that resulted in most general insurance companies slipping into the red, this would be a bitter pill to swallow.
“The UK actuary report, which studied the asset-liability of the third-party motor portfolio, has prescribed a reserve requirement of 205 per cent on the thirdparty motor pool portfolio. Given the losses and provisions made last year, Irda may initially settle for 175 per cent,” said a senior Irda official.
However, before implementing the norms, a draft report by the regulator would invite feedback from the industry.
“We have asked for some small clarifications from the UK actuary. After that, it would be made available to the industry. Only after deliberating the issue with the industry stakeholders, would it be implemented,” he said.
The UK actuary was assigned the task after the earlier report by eminent actuary, K P Sharma, suggested provisioning of 153 per cent. Consequently, in March, Irda increased the provisioning requirement for the commercial thirdparty motor pool losses from 136 per cent to 153 per cent.
This hit the solvency margins of many insurance companies, which prompted the insurance regulator to relax the solvency requirement from 150 per cent to 135 per cent for 2010-11. Based on the industry feedback, the regulator decided to conduct a peer review on the issue and had appointed the actuary of the UK government.
Only four of the 24 private general insurance companies in the country reported profits during 2010-11, on account of higher provisioning for third-party motor pool losses. To provide some relief to insurers, third-party premiums were increased by roughly 10-60 per cent, which insurers say was not sufficient.
“We are yet to see the report. But the rise in the provisioning requirement would be hard to absorb. Last year, the provisioning requirement was increased from 136 per cent to 153 per cent, and this impacted the profitability of all the general insurance companies. Though third-party premium rates were raised, it was not sufficient,” said asenior official at a private general insurance company.
The motor portfolio, which accounts for around 43 per cent of the total premiums, has been the ‘Achilles heel’ for general insurance companies in India, owing to inherent commercial third-party losses.
Total premiums collected by general insurance companies stood at around
'44,000 crore in 2010-11, of which motor premiums accounted for '18,000 crore.
Typically, third-party liabilities account for 35 per cent of the total motor premiums.
In a bid to distribute the losses among insurers, Indian Motor Third-Party Insurance Pool was set up in April 2007 for commercial vehicle third-party insurance businesses. The share of each insurer was decided according to its market share in all lines of businesses.
