The Hindu Business Line : Cap likely on third party liabilities of insurers

THIRD party liabilities of non-life insurers in the country are likely to be capped from April 2006 onwards in a bid to ensure losses are under control.

Sources said that this would imply that the insurers' liability would be limited to a ceiling.

Any compensation award to accident victims beyond that ceiling would have to be borne by the vehicle owners or fleet (commercial vehicle) operators themselves.

The ceiling has so far not been decided by the Insurance Regulatory and Development Authority (IRDA), the sources added.

But Dr K.C. Mishra member, IRDA and Director of the National Insurance Academy, Pune said, "The ceiling is likely to be anywhere between Rs 5 lakh and Rs 7.5 lakh."

This is because the maximum liability for airline companies is Rs 7.5 lakh per person and for the Indian Railway it is Rs 5 lakh.

This would mean that accident victims' compensation from insurers would be within this ceiling.

However, for high net worth individuals seeking higher settlements, the sources said, they would have to go for additional insurance covers.

In motor insurance, even passengers travelling in cars/ buses are treated as third party.

Capping of third party claims has been a long-standing demand of the public sector insurers. In fact, the four public sector insurers - New India Assurance Company Ltd, United India Insurance Company Ltd, National Insurance Company Ltd and the Oriental Insurance Company Ltd - had sought such a ceiling.

Currently, there is no ceiling on motor liabilities and as a result has remained a portfolio bleeding the industry.

Third party losses for the domestic insurance industry are in excess of a 175 per cent, ranking among the highest in the world.

The sources said that a ceiling would allow insurers also to seek reinsurance cover for such losses.

In fact, the absence of the ceilings had made reinsurance cover difficult for primary insurers.

The sources said that once the ceiling becomes operational, the primary insurers would be in a position to take protection through excess of loss covers with either domestic or international reinsurers.

Excess of loss protection, implied that losses over the retention capacity of the primary insurance, would be covered by the reinsurer.

The sources said that the ceilings would also help them improve their provisioning. This was because provisions could be done on the basis of the ceiling.

Currently, provisioning is difficult for the insurers since their actual liability is known in third party covers.

Consequently insurers make only ad-hoc provisions and sometimes resort under provisioning to generate higher profits.

In fact, this was also one of the major factors that has been deterred the private sector from entering the sector in a big way, the sources said.

Private sector so far had restricted their business only to low claims passenger cars sectors and stayed away from commercial vehicles and third party liabilities.

Imposing a ceiling would result in making the sector into a level playing field for both private and public sector, the sources added.

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