A potholed road

Insurance cover for third party liability in accidents is mandated by law for all vehicles plying on Indian roads. Such insurance cover is sorely needed, given the abysmal state of road safety and the enormous loss of life and income incurred in road accidents. Normally, this should be a business opportunity for firms offering motor insurance. But confused government policy seeking to keep tariffs artificially low while offering unlimited risk cover has led to losses for every player in this space. Even the insured aren't very satisfied with the system, with many claimants approaching the judiciary with third party claims, cases dragging on for years and courts awarding ad-hoc compensation.

The main problem with third party liability business for Indian insurers is that it is prima facie unviable due to fixed tariffs and mounting claims. While premiums for all other general insurance products were deregulated in 2007, those for third party vehicle insurance continue to be fixed by the regulator. With insurers having no leeway to price in higher risk, they have tried to avoid perceived high-risk segments such as heavy commercial vehicles. But the regulator has reacted by imposing mandatory quotas on all firms (in proportion to their market share) for funding commercial vehicle third party covers. Insurers who don’t voluntarily fulfil this quota are forced to share industry losses through a convoluted pooling system. While insurers are hamstrung by the quotas and regulated premiums, the third party claims they face in each accident can range anywhere between a few lakhs and a few crores, with no time limitation on claims. It is therefore no wonder that the claims and expenses incurred by general insurers in this business have regularly overshot revenues, saddling them with losses.

Given the multiple problems besieging the industry, there seems to be no easy way out. Deregulating tariffs on third party covers and allowing insurers to set premiums based on risk is the only viable long-term solution. To reduce the burden on vehicle owners, this can be done in a phased manner, with a clear roadmap on annual hikes and transparent disclosure of factors that go into pricing. Capping the third party accident liability at a fixed sum based on empirical data (the Indian Railways caps its accident compensation at ₹4 lakh per passenger) and imposing a time limit on claims will also help insurers, while expediting claims settlement and reducing legal costs for customers. The expeditious passage of the Road Transport and Safety Bill of 2014, which proposes stiff penalties on safety violations and streamlines the process for dealing with accidents, may also go a long way in aiding this transition.

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