The Hindu Business Line : Insurers drop demand to cap motor cover liabilities

In a complete volte-face, general insurers, both in the public and private sector, have dropped the demand for capping of liabilities in motor third-party risk covers.

High-level sources said that the change in stance came after analysis of industry-wise data on claims.

Till recently, insurers had pitched for a ceiling on third party claims on the lines of aviation.

This was to enable them to make accounting of provisions - for unexpired risks and provisions for incurred but not reported claims - accurate and conform to global standards.

This, in turn, would help the insurers work out the bottomline figures more accurately.

This move was also intended to know the probable maximum loss (PML) an insurer would incur in the event of claims being made.

The major problem the insurers had with the third party liabilities was that the claims were fixed by motor accident tribunals, as a result of which the PMLs were unknown.

The sources said that the ceiling was now no longer an issue.

They added that after compilation of an industry-wide database, it was now clear that that average claim value was only Rs 1.4 lakh.

Despite the low value of third party claims, the average premium collected in motor third party risk was only Rs 75,000 per year. This translated into a claims ratio of 187 per cent, still making it unviable for insurers.

The major problem lies not in the value of the claims but in the number of claims, which are on the high side compared to global trends, the sources said.

Consequently, even if a cap were introduced, it would still not solve the problem of high claims ratios.

High claims in motor vehicles are a major element bleeding the insurance companies, particularly the public sector. Since none of these claims are reinsurable, the losses are entirely absorbed directly into the balance sheets.

Moreover, the sources said, private sector companies, despite repeated fiats from the IRDA, continue to steer clear off motor insurance, in particular commercial vehicles.

Most of these covers are still serviced by public sector companies.

The losses are, in turn, cross-subsidised by more profitable sectors like fire and engineering.

This cross-subsidisation is becoming difficult, the sources said, because the private sector, which is not burdened by motor vehicle claims, is in a better position to reduce the tariffs for low claim risk covers.

The public sector general insurers have pushed for a complete deregulation in the risk pricing of third party liability covers of motor vehicles.

However, the roadmap for detariffing or free pricing prepared by the insurance regulator has not addressed the issue.

The public sector companies have pressed the regulator for changes and higher loading in motor third party risks as well when the free pricing regime comes into effect.

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