Motor insurance premiums set to rise in April

Your insurance costs for cars, bikes and trucks are set to rise. They could go up from anywhere between 20 per cent and 70 per cent.

This follows the Insurance Regulatory and Development Authority's (IRDA) move to replace the third party motor pool arrangement. This is being replaced by a ‘declined pool' where premiums are likely to go up because of risk-based pricing.

According to Mr Amarnath Ananthanarayanan, Managing Director and Chief Executive Officer, Bharti Axa General Insurance, “The pool structure would lead to actuarial determination of the pricing of risk. Pricing would go up for bad risks and the good risks would actually benefit from lower pricing. But, overall I would expect the price to go up by 20 per cent.”

Motor insurance in India covers one's own damage and also third party damage to property or life. Customers have the option of choosing between a stand-alone cover and a comprehensive one.

Third party coverage is, however, mandatory by law for both commercial and private vehicles as it provides coverage for any kind of damage to third party's life or property.

The third party pool was created in April 2007 by all general insurers to make available Third Party Insurance to all commercial vehicle owners at reasonable rates.

Till then, such insurance was provided by public sector insurers (at a heavy loss), while private insurers were reluctant to provide the cover.

The third-party motor pool in the current form has a loss ratio of 150 per cent.

The pool, which had earned a premium of around Rs 3,500 crore, has suffered a loss of over Rs 7,000 crore in the first six months of the fiscal

General insurers share the loss arising out of third party liability through this pool. The share of loss is determined by the market share of each general insurer.

Under a declined pool mechanism proposed by IRDA from April 2012, every company will issue policies to all who approach it. Only, the liabilities arising out of a stand-alone third party cover will be shared among general insurers from the pool. For covers having an own damage component, the claims would be serviced by the general insurer who had underwritten the policy in question.

So, pricing will move according to the claims paid by the insurer; and a comprehensive cover will cost more.

Experts, however, think that the new pool structure will bring about a more efficient structure and faster claims settlement.

This is expected to reduce major costs such as litigation for insurers in the long run.

“Efficiency of managing claims was low as earlier everything was going to the pool. Now, overall size will reduce and become equitable." said Mr Gaurav D. Garg, Managinf Director and CEO, Tata AIG General Insurance.

“In the long-term, the new structure will improve efficiency in claims management. Policyholders can look forward to better rates when claims come down,” said Mr Bhargav Dasgupta, Managing Director and Chief Executive Officer, ICICI Lombard GIC.

Mr R.R. Belle, Managing Director and Chief Executive Officer, SBI General Insurance, says, “The declined pool is a medium-term solution. As the industry evolves and the declined pool keeps reducing, the industry will finally move to a system where there will be no pool.”