Third-party (TP) claims are undoubtedly a drain on insurance companies, primarily due to unlimited liability amounts, but should IRDA base the TP premium pricing on more than just engine cc? Your TP premium may be subsidising the commercial vehicles responsible for insurance companies’ losses
The Insurance Regulatory and Development Authority (IRDA) has proposed an increase of nearly 40% in third party (TP) motor insurance for private cars in its draft on revision of premium. If you drive a car that’s below 1000cc (Tata Nano and Maruti Alto, for example), your TP premium may increase by 85%, come April 2013. High increase in premium for entry-level cars may be because these cars are purchased by those who have just acquired their driving skills and the possibility of higher TP claims arising from them. Surprisingly, the hike will be only 1.4% for cars such as Hyundai Santro and Maruti Swift, whose engines are between 1000cc and 1500cc. For cars over 1500cc, including Fiat Punto and Ford Ikon, the hike will be of 43%.
According to Mukesh Kumar, Head-HR, marketing and strategy planning at HDFC ERGO, “The vehicles in the private car segment with engine capacity exceeding 1500cc are extensively used, usually for longer distances and, therefore, result in higher risk exposure. This leads to relatively high TP losses due to which the hike in premium is justified.”
For goods-carrying vehicles, there is a proposed decrease in TP premium for those not exceeding 12,000 kg. There is hike of 107% for those vehicles in the 12,000-20,000 kg range. Mukesh Kumar says, “The proposed hike is still inadequate for this class, judging from the loss experience. Vehicles with higher tonnage are used for longer distances, mostly inter-state. Therefore, the risk exposure is higher.”
According to Dr Amarnath Ananthanarayanan, CEO and MD, Bharti AXA General, “The TP business is long-tailed, with no upper limit on the claim amount and no limit for when the claim can be filed. This makes risk evaluation and therefore, pricing extremely complicated. Overall industry data may be able to throw light on whether the pricing is adequate to cover the risk. The rate increase is high, but necessary, given the unlimited claim amount for TP. We hope the Motor Vehicle Act is changed to limit the claim amount so that the industry can pass on lower TP premiums to customers.”
Own Damage premiums are based on numerous parameters like car model, location, fuel option, security system and even consider personal data like age, marital status and occupation. The question that one may have is whether engine cc is a good enough parameter to decide the TP premium? There may a need to look beyond the car engine cc to decide the TP premium.
For example, geographical area of a private car will have different TP claims experience. For commercial vehicles, there will be more TP claims for those with an all-India permit than those plying in specific areas. Vehicles used 24x7 may have more TP claims. There are specific car makes that may be registered as private vehicles, but are used for commercial purposes and hence have more TP claims. Is it true that going by engine cc is too simplistic?
According to Avadhoot Mavlankar, principal officer, Shinrai Insurance Broking Services, “Use of the vehicle and geographical area can help to underwrite the TP risk properly. Some of my clients’ loaders/excavators and goods-carrying vehicles are registered as public carriers, but ply only within a certain vicinity such as New Mumbai. There is hardly any TP claim. The black-yellow taxis and auto rickshaws have the lowest claim experience in the TP segment.” The proposed hike for auto rickshaw and taxi insurance is 11% and 13%, respectively.
According to an industry source, “Many TP claims from commercial vehicles arise from accidents with trucks and tempos with all-India permits. With such vehicles, the risk is higher than with commercial vehicles restricted to a city. The transportation lobby is strong and they are able to keep the TP premium low.”
Many insurance companies are keen to underwrite specific commercial vehicles that are “good risk” for their business. Third-party motor insurance is the only segment where the tariffs are set by IRDA. The Authority has made use of the data available with the Insurance Information Bureau for the experience period of the Underwriting Years (i.e. Policy Years) 2007-08 and 2008-09 in respect of number of policies, claims reported and amount of claims paid up to 31 March 2012.
The TP liability cover, which is mandatory in India, does not provide any benefit to the insured; however, it covers the insured’s legal liability for death/disability of third party loss or damage to third party property.
All stakeholders are invited to provide their comments on this draft proposal so as to reach the Authority, also by e-mail addressed to email@example.com, on or before 1 March 2013.