The Hindu Business Line : Motor insurance pool to take off from April 1

Bangalore March 26 After being mired in a series of disagreements, the India Motor Insurance Pool (IMIP) is poised to formally begin operations from April 1.

The original proposal was to start operations from January. However, that did not happen due to differences between the public and private sector insurance companies. Moreover, bugs in the software delayed the implementation of IMIP that is entirely IT-driven.

IMIP is a mechanism where, a pool, created by the 12 public and private sector non-life insurers, takes over third party motor risks. The share of each insurer in the pool is on the basis of the gross direct insurance premium collected. The mechanism is to be administered by the national reinsurer General Insurance Corporation (GIC). Insurers underwriting on behalf of the pool would be entitled to an administrative commission of 10 per cent of the premium. GIC would also provide reinsurance support, though this would be limited to 15 per cent.

Differences ironed out

The intra-insurer differences were ironed out after a series of meetings between all the insurers and the Insurance Regulatory and Development Authority (IRDA). Bajaj Allianz General Insurance Company Ltd's Managing Director and Chief Executive Officer, Mr Kamesh Goyal, said, "There are no differences now."

Service tax

Incidence of service tax was another issue which dogged the implementation of the pool. On the basis of the original definition, service tax would have been levied on both the insurer and the pool manager, leading to double taxation. The double taxation would, in turn, lead to an escalation in the premiums of third party risks. Sources said that the GIC, the pool administrator, had taken up the double taxation issue with the Ministry of Finance. This issue, though, had not received mention in the Finance Bill for 2007-08.

However, the Secretary-General of the General Insurers Council, Mr K.N. Bhandari, said, "Service tax has been clarified and there will be no tax incidence on cession to the IMIP." This was communicated to all the insurers, he added.

But even before such clarifications were issued, some of the private sector insurers had aggressively sold third motor insurance risk covers to customers in a bid to ramp up premium income. This was largely on account of the commissions that the pool offered to the participating insurers. Insurers transferring the risk to the pool were entitled to a 10 per cent commission, under the IMIP agreement, signed by all the participating insurers. However, with the pool beginning operations only next month, the insurers that had sold commercial vehicle covers would now have to assume the risks directly on to their respective balance sheets, the sources said.

The pool itself is likely to have drastically removed the sheen off the private sector insurers' balance sheets. Private sector insurers' balance sheets have shown claims ratios averaging 70 per cent and consequently shown underwriting profits since the second year of operations.

The sources said that the next year onwards almost all the insurers would have to make provisions for potential liabilities, on the same lines as the PSU insurers.

For the PSU insurers, the pool would have exactly the reverse effect - improved underwriting margins, the sources added.

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