Road transport sector -- Increasing cost of cover

Asis Bandyopadhyay

THE Motor Vehicles Act, 1988, is a piece of social legislation, the provisions of which are designed to protect the rights of road accident victims. The use of a vehicle in a public place may cause injury to a person or damage to third-party property.

Section 146 of the Act seeks to protect members of the public travelling in vehicles or using roads from the risks attendant upon the use of motor vehicles on the roads, and provides that no person shall use (except as a passenger), or allow any other persons to use, a motor vehicle in a public place, unless the vehicle is covered by a policy of insurance complying with the requirements of the Act. This insurance ensures payment of adequate compensation to victims of road accidents.

There are basically two types of motor policies that are used in motor insurance. The Act Only policy, which provides cover as required by the Motor Vehicles Act that is, cover against possible liability to a third party arising out of the use of the motor vehicle, and the Comprehensive Policy which, in addition to the Act Only cover, also provides coverage to the motor vehicle itself against loss or damage due to certain named perils.

The premium charged by insurers usually depends on various factors, such as the type of vehicle, the use to which the vehicle is put, the value for which the vehicle is insured, the geographical area of operation, the claims experience, and so on.

Private cars differ from other commercial vehicles, both with regard to the degree as well as the manner of utilisation. Commercial vehicles are subject to optimum or even maximum utilisation, including driving during the night, which leads to greater incidence of accidents, wear and tear, etc., whereas private cars are used less frequently and for shorter durations. Private cars are also better maintained than other commercial vehicles.

These differences are taken into account by insurance companies for rating purposes, which means private cars usually enjoy lower rates of premium than commercial vehicles. The motor insurance business in India is tariffed, which means that the rates of premium charged are laid down by an independent body called the Tariff Advisory Committee, which is now under the control of the Insurance Regulatory and Development Authority. The rates of premium are generally determined by the claims experience as revealed by the business statistics submitted by all the insurance companies.

Motor Claims are usually of the following types: Total loss own damage claims; total loss theft claim; partial loss own damage claims; partial loss theft claims; third party death/personal injury claims; and third party property claims. Basically, these can be categorised as own damage claims and third party claims, which are quite distinct from each other.

The quantum of own damage claims is usually easier to assess than the quantum of third party injury/death claim. Own damage claims are determined by the insured value as well as the market value of the vehicle at the time of loss/accident, whereas there is no upper limit to third party claims.

Own damage claims are usually settled directly with the insured vehicle owner/financier with whom the insurable interest rests by the insurance company. But, in third party claims, the claims are generally settled through Motor Accident Claims Tribunals. In view of the legal wrangles involved, third party claims usually take many years before they are settled, whereas own damage claims are settled without much delay after the assessment of loss/damage is done.

The figures for the Indian general insurance industry as a whole which are available only for the four-year period ended 1998-99 show that the experience for third party business is adverse, being consistently over 220 per cent. For the motor portfolio as a whole the experience is over 110 per cent, which means that for every Rs 100 premium earned by the industry it pays out Rs 110 as claims.

Taking cognisance of the extremely adverse claims experience in the compulsory portion of the motor insurance third party segment, insurance premiums were hiked considerably from February 1, 1998. Since the claims experience was most adverse in the commercial vehicles category, the hike was the most severe in this class. However, various associations of goods-carrying vehicle-owners litigated the issue in the Supreme Court and obtained an injunction against this hike.

In view of the social service objectives followed by the four public sector general insurance companies and in view of the social service nature of motor insurance itself, the premium rates had so far been pegged at a very low level in comparison with the claims. However, in the changed insurance scenario in the country with the introduction of the IDA as well as the entry of various private insurance companies, it is unlikely that the status quo will remain.

Private insurers will certainly find it uneconomical to insure at the current rates of premium. Besides, the IRDA rules themselves now require every insurer to maintain a stipulated solvency margin for every class of business separately.

Cross-subsidisation of different classes of business will no

longer be allowed, and insurers will be required to file class- wise Statements of solvency margin every year with the IRDA and an inadequate solvency margin will invite penalty up to Rs 5 lakh for each failure to comply with the provisions of the Act.

Hence, an upward revision in premium rates is expected any time now, and the Tariff Advisory Committee is at present deliberating this issue.

Another question that is likely to be taken up for consideration is the question of unlimited liability for road traffic accident victims. The concept of such unlimited liability is a burden to the insurers and does not seem fair, as liability to victims of rail and air accidents are also limited in nature.

(The author is Principal, National Centre for Insurance Learning, Kolkata. The views expressed are personal.)