Financial Daily from THE HINDU group of publications
Monday, Feb 11, 2002
Money & Banking - General Insurance
PSU insurers trim third-party cover
BANGALORE, Feb. 10
PUBLIC sector insurance companies have begun cutting back on third-party insurance cover for commercial vehicles. This is part of a strategy to make the core business of underwriting profitable.
Sources said that this move had already been put in place by three of the four insurance companies - United India Insurance Company, National Insurance Company and New India Assurance Company. The fourth one, Oriental insurance Company, was expected to follow suit soon, they added.
Currently, commercial vehicle operators, which include both passenger buses and goods transport vehicles, take third-party cover after a period of 10 years, when the assets are fully depreciated.
Private sector insurance companies are already staying away from third-party cover to commercial vehicles. Private sector insurers are already restricting their motor insurance portfolios to just personal transport vehicles. The only exposure in commercial vehicle by the private sector is through coinsurance, which effectively helps in reducing potential liabilities. One of the major reasons for insurers to restrict this kind of insurance cover stems from the large underwriting losses. Consequently, third-party insurance covers have direct impact on the solvency of the companies. High claims would imply erosion in the solvency, which is precisely what had been happening in the public sector insurance companies in the past.
Sources said that premium collections in third-party insurance were high compared to the rest of the sectors. However, the claims were also high unlike in other sectors. Also, the liabilities in third-party insurance are virtually unlimited, unlike in the other risk covers where the liability is restricted to the sum insured. Further, in other covers like fire or industrial risk, insurers had the option of taking reinsurance cover, which is non-existent in third-party commercial vehicle covers.
Further, the high claims ratios would require periodic hike in premiums to offset the losses. However, none of insurance companies have so far been allowed to raise the cost of third-party risk cover. The last time insurance companies attempted to raise the premium in 1999, truck operators went on a nationwide strike, forcing the Government to pressure the insurers to initiate a rollback.
Sources said currently commercial vehicles insurance was one of the major contributors for underwriting losses in the insurance sector. The claims ratio in motor insurance alone is in the region of about 140 per cent to the premium income. Such losses were sustainable so long as return on investments were high. But insurance companies currently are hamstrung by falling returns on investments. Besides, some of the past investments such as corporate debentures and State Government guarantees have already gone bad, further eroding their returns. Average return on investments had sunk to about eight per cent on a weighted average basis, they said.
As a result, one of the suggestions made by the insurance companies to restrict the losses is the capping of third-party liabilities. But so far, the Ansari committee, which has been formed for revamping motor insurance, has not accepted this suggestion. The committee is due to present its report.
The sources said that this year restricting third-party cover would bring down the overall claims ratio to below 70 per cent. This would, in turn, allow them greater flexibility to expand operations in other areas of general insurance.
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