Third party motor insurance rates likely to be market driven by year-end

Third party motor insurance premium rates are likely to be market driven by the end of this calendar year. To usher in this regime, the Insurance Regulatory and Development Authority (IRDA) is planning to de-tariff the rates. For vehicle owners, risk-based pricing will set in. Insurers will load or increase premium rates sharply for loss-making categories of vehicles, while those with low claims will get discounts.

But, first, the rates are likely to go up from April this year, consequent to an IRDA proposal for rate hikes of between 25 per cent and 137 per cent.

“We have taken a policy on freeing pricing and are working on a roadmap for de-tariffing third party premium rates,” said M Ramprasad, Member, Non-Life, IRDA. Currently, third party motor insurance is the only segment where premium rates are fixed by the insurance regulator. Third party liability premium rates have been going up for the last two years.

Two components Motor insurance in India has two components: own damage cover and third-party cover. The latter is compulsory, to cover third-party damage in terms of property or life.

While own damage is a profitable portfolio for insurance companies, third-party insurance is highly unprofitable as the liability for insurers is unlimited.

So, at present, due to the high claims ratio of around 140 per cent from commercial vehicles, insurance companies provide them cover from a common declined pool and not from their own books. Ramprasad said that since the declined pool has completed two years, the regulator will be able to study loss trends and the kind of vehicles that come into the pool. IRDA fixes tariffs for third party motor insurance premiums to ensure that there are no supply-side constraints, that is, vehicles considered high risk are not denied cover.

Industry officials say the size of the declined pool, at ₹400 crore, is small which means that more insurance companies are underwriting risk on their own books.

“The industry will be able to move away from a one-size-fits-all premium for vehicles,” said Sanjay Datta, Head (Underwriting and Claims), ICICI Lombard General Insurance.

Madhukar Sinha, National Head (Personal Lines), Tata AIG, said when rates are de-tariffed, there could be variation in premium rates across insurance companies as each insurer will be free to fix rates depending on their underwriting policies.

G Srinivasan, Chairman and Managing Director of New India Assurance, said that while it is a much-needed move for the industry, it needs to be implemented carefully as it could lead to supply-side issues for vehicles which are considered high risk.

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