Premiums may shoot up as Irda bats for declined pool

Get ready to shell out more for your motor insurance. The Insurance Regulatory and Development Authority’s (Irda) move to replace the third party motor pool by a declined pool is likely to jack up premium because of the risk-based pricing model to be followed by motor insurers.

The regulator on Friday came out with a circular to this effect, which said the new norms will take effect from March 31, 2012.

“Premium may rise under the risk-based pricing by 70-80%,” said an industry official, requesting anonymity.

“It obviously is a right step because it will ensure equitable and fair share of third party motor business brought in by all insurers. Administration and processing of claims will be easier to manage. Dismantling the motor pool will help reduce insurers’ losses to some extent,” said Sanjay Datta, head customer service, ICICI Lombard, a general insurance company.

Motor insurance in India has two components, one covering one’s own damage, and the other covering the third party damage in terms of property or life. The third party coverage is mandatory by law for both commercial and personal vehicles. It provides coverage for any kind of damage to third party’s life or property.

General insurers share the loss arising out of third party liability through a pool that took hold in 2007, which basically depends on the market share of each general insurer. Customers have the option of choosing between a stand-alone cover and a comprehensive one.

Under a declined mechanism suggested by the regulator, liabilities arising out of a stand-alone third party cover may be shared among general insurers from the pool. Otherwise, if the cover has an own damage component, then the claims should be serviced by the general insurer who had underwritten the policy in question.

Experts feel that if the underwriting insurer will be paying out the claims, then the pricing will move accordingly.

This explains why it would lead to a much higher motor premium if you have a comprehensive cover.

“The stand-alone third party policies will continue to be available to customers. With the dismantling of the pool, the distortions created before will be cleared out soon. Every insurer will be accountable for the business he writes, thus promoting efficiency.

Hence, indirectly every customer will get quality services,” said Ritesh Kumar, managing director and CEO at HDFC Ergo.
Under the new framework, insurers still retain the liberty of declining vehicle insurance after a risk analysis and get that covered under the pool. There was a high discrepancy found in the price and the loss incurred from the motor pool since the third party premium was comparatively low. Because of higher claims and claim frequencies, it meant losses for insures.

Insurance companies feel that there should be a dynamic correction in price for the smooth functioning of the business. All they want is a modified tool which is in sync with the share of motor business rather than individual market share.