Why growth in motor own-damage premiums has been flat this year

Radhika Merwin BL Research Bureau | Updated on February 19, 2020

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Intense price competition, post the mandatory long-term insurance implemented more than a year ago, is a key reason

A spate of regulatory changes over the past two years has impacted the motor insurance business of general insurers in India. The mandatory long-term third-party insurance that kicked in during September 2018 and the Motor Vehicles Act 2019 that came into effect from September 2019, have completely changed the motor segment of the business, according to leading insurers. According to data put out by the General Insurance Council, while the total gross direct premium income (GDPI) for the overall industry (general insurers) has grown by 13.4 per cent year-on-year (y-o-y) in the nine months ended December 2019, motor insurance that constitutes a significant 35 per cent of the overall business has grown in single-digit.

In the first nine months of FY20, total motor GDPI has grown by 8.8 per cent y-o-y. The overall growth in motor premium has been dragged by the flat growth in motor own-damage. Growth of motor own-damage GDPI has been 0.7 per cent y-o-y, while motor third-party GDPI has grown by about 15 per cent.


Intense pricing competition in the own-damage business, post implementation of the mandatory long-term third-party insurance in September 2018, along with relative slowdown in new vehicle sales, have been key reasons for the meagre growth in own-damage premiums this year.

Pricing competition

Motor insurance has two components — a third-party (TP) cover and an own-damage (OD) cover. The former is mandatory and covers the legal liability arising out of damage to third-party or bodily injury or death. OD is optional and protects vehicles against damage or theft.

In September 2018, the mandatory long-term insurance that kicked in, required customers to take mandatory five-year TP cover for new two-wheelers and three-year cover for cars. But the customer had the discretion to either take OD cover also for longer term or just for one year and then subsequently renew it in the coming year. While TP rates are decided by IRDAI, insurers have flexibility to decide on the OD cover premiums.

Insurers vying for the more profitable motor OD business, have been competing intensely on pricing, passing on the benefit of renewal/distribution cost reduction to the customers. This has led to a fall in overall OD premiums in the industry.

“If a customer opted for a one-year OD cover at the time of implementation of the mandatory long-term insurance in September 2018, then he would have had to renew the OD cover in September 2019. Hence, September 2019 onwards, insurers including ICICI Lombard started issuing standalone OD covers. Insurers have been aggressively pricing these policies,” said Gopal Balachandran, CFO & Chief Risk Officer at ICICI Lombard General Insurance.

But the renewal of OD cover has also opened up opportunities for leading insurance players. Over the past fourth months, ICICI Lombard has seen the thrust on renewal of own damage covers pay off and seen an increase in retention of customers. ICICI Lombard has managed to grow higher than the industry in motor OD. In the nine months, ICICI Lombard’s motor GDPI has grown by a healthy 10 per cent. On a much smaller base, Cholamandalam MS General Insurance too has seen a 12 per cent growth in motor OD.

Pricing in the motor OD segment may also improve, going ahead. “The intensifying competition in the motor OD has come to a point where it has started to hurt the industry. Hence, pricing competition should ease and sanity should return soon,” adds Gopal Balachandran.

Many players such as Tata AIG, Bajaj Allianz and HDFC ERGO have focused on third-party business to drive growth, even as OD premiums have grown at a modest pace. Third-party motor GDPI for these players have grown by 21-33 per cent in the April-December period. The regulator revised the third-party rates effective June 16, 2019. This has also aided in the growth of third-party premiums.


Motor Vehicles Act

Coming out of the interim disruptions owing to mandatory long-term insurance, the prospects of the motor insurance business remain healthy. The Motor Vehicles Act 2019 that came into effect from September 2019 has led to a lot of customer awareness and increase in motor insurance issuance. Aside from increased penalties for driving errors, the law also increased the penalty for driving an uninsured vehicle.

Published on February 19, 2020

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