The Hindu Business Line : Motor cover premiums set to drop

MOTOR vehicle owners, battered by rising fuel prices, can now look to some relief. Motor insurance premiums are poised for a sharp fall beginning April next year, when de-tariffing comes into effect.

Sources said the detariffing of motor insurance premiums by the Insurance Regulatory and Development Authority would result in better price discovery for risks. This would essentially imply that tariffs in low claims sectors would come down as it happened in the case of the fire insurance sector after de-tariffing was put in place.

Currently, the insurance tariffs for personal cars range between 3.2 and 3.5 per cent of the declared value of the automobile. Expectations are that if the claims experience in the personal automobile sector were taken into account, tariffs would drop below 3 per cent from next year after de-tariffing comes into effect.

At present, the claims ratios in cars are among the lowest in the miscellaneous category, which include motor vehicle insurance. Claims ratios for the motor vehicles as a sector was about 150 per cent, but the figure for personal vehicles were less than 70 per cent. The high average for the entire sector was on account of the commercial vehicles component, where the claims are about 175 per cent.

Consequently the premia would likely remain high in the case of commercial vehicles, the sources said. The major component of losses in the insurance sector was on account of the commercial vehicles and third party liabilities. The pricing of these products, the sources said, was not commensurate with the risks.

As a result, there were moves in the industry, particularly among the private sector insurers to segregate covers. A private sector insurer said, "Segregation will allow more competitive pricing of risks and help bring down overall tariffs."

Currently, the risk covers available were the liability only and the package covers. The package cover or the comprehensive insurance policies included driver/owner risk cover, property and third party liabilities. The liability cover included only third party liabilities. The segregation would allow insurers to offer liability and property covers as separate products.

The sources said that in fact some of the private sector insurers have, for some time, been pushing for such separate covers. The reasoning for separate risk covers, was that it would allow insurance companies to arrive at a Probable Maximum Loss ratio and accordingly help them price the products.

Now one of the major difficulties faced by the insurers is that they have been unable to estimate losses since there are no caps on liabilities, despite persistent demands for one. In the case of third party liabilities, the insurers payouts are determined normally by the motor accident tribunals.

This system in the past had led to very high payouts by the insurers for claims settlements, leading to losses. The high losses in the motor third parties have, as a result, prompted private sector to restrict participation in the motor insurance. Besides, creating provisions for unexpired risks was also becoming a problem, since the losses could not be estimated, the sources added.