CHALLENGES AND OPPORTUNITIES FOR INDIAN MOTOR THIRD PARTY INSURANCE POOL

Transcription

1 CHALLENGES AND OPPORTUNITIES FOR INDIAN MOTOR THIRD PARTY INSURANCE POOL INTRODUCTION Jagendra Kumar, Corporate Head, (Trg), Shriram Group Companies, Jaipur Indian Motor Third Party Insurance Pool (IMTPIP) has been set up by all General Insurers in India to collectively service Commercial Vehicle Third Party Insurance business. Insurance Regulatory and Development Authority (IRDA), after consultation with the Committee constituted under Section 110G of the Insurance Act, has directed that all general insurers registered to carry on general insurance business or general reinsurance business shall collectively, mandatorily and automatically participate in a Pooling Arrangement to share in all Motor Third Party Insurance business underwritten in respect of Commercial Vehicles by any of the registered general insurers. As per IRDA directive, Motor Pool is in operation from 1 st April The objective of the pool is to make available Third Party Insurance to all Commercial Vehicle owners at reasonable rates and terms. It is an agreement among General Insurance Corporation of India (GIC) and Insurers registered to carry on General Insurance business (including motor insurance business) or general reinsurance business, under the Insurance Act, 1938.Every insurer who is registered for carrying on general insurance business under the Insurance Act, including GIC of India is the member of the Pool. Specialist insurers like ECGC, Agriculture Insurance Company of India Ltd., and stand-alone health insurers are exempted. Starting off with a corpus of around Rs 2,800 crore, Indian Motor Pool includes only premiums from commercial vehicles. Third-party premiums charged on cars and two-wheelers are not included in the pool and these are handled by the general insurance companies themselves. Third-party insurance is the cover related to injury or death to others while driving. All third party risks are transferred to the India Motor Insurance Pool, in line with the insurance regulator s directive, virtually leveling the field between public and private sector players. All the registered insurance companies are collectively participating in a pooling arrangement to share in all motor third party insurance business underwritten by them. According to the arrangement, all private sector insurers have to contribute to the pool consistent with their market shares. The private sector currently has a market share of 40 per cent in the general insurance business. * The author can be contacted at [email protected] 48 Bimaquest - Vol. VIII Issue II, July 2008

2 RISK POOL SYSTEM The system is almost identical to what is currently adopted in Japan where the motor vehicle third-party risks are administered through a government fund. All the premiums collected as third-party risk cover by the non-life insurers, public and private, are credited to the pool. All claims are administered from the pool. IMTPIP is a mechanism where, a pool created by the 13-public and private sector non-life insurers took over all third party motor risks. The share of each insurer in the pool was decided on the basis of the gross direct insurance premium collected. The mechanism is administered by the national reinsurer General Insurance Corporation (GIC). Insurers underwriting on behalf of the pool are entitled to an administrative commission of 10 per cent of the premium. The General Insurance Corporation of India receives a fee of 2.5% of the entire corpus for managing the pool. Commercial vehicles contribute almost 70% of the total motor third-party premiums. The new system of operating through a pool marks a completely different way of addressing motor insurance, particularly for commercial vehicles, which have a higher risk profile. With any motor third party risk getting shared by the common pool, the issue of denying any third-party covers or cherry picking on motor insurance does not arise any more. THE LION S SHARE OF PSUs The pool is an agreement where all companies agree to share the losses or profit in the ratio of their overall market share. Public sector insurers continue to write the lion s share of motor third-party insurance premium. Till March 2008, there were 12 general insurance companies contributed as member to the Pool in addition to the GIC Re. Although private insurers have increased their market share of profitable motor own-damage portfolio from 29% in to 42% in , their share of third-party insurance has grown only marginally from 13% to 19%. The public sector insurers had reduced its exposure in the TP portfolio in , and have now increased it in from Rs 670 crore in The rise has also partly been due to a 70% rise in premium for TP covers. Insurers losses are covered to that extent. The four public sector insurers registered a total premium income of Rs 2,496 crore in against Rs 2,292 crore in a near 9% growth in the TP segment. This figure has increased to Rs 9158 crores in as against Rs 6172 crores of eight private insurers. The ratio of premium procured in is 60:40. While the number of policies issued by PSU insures are against policies issued by private insurers in ratio of 56:44. The motor pool and new tariffs were effected towards latter part of the fiscal not allowing insurers to take benefit for the full year. In , insurers are expected to take full benefit of the developments. Bimaquest - Vol. VIII Issue II, July

3 The premium figures (unaudited) transferred to the Pool upto 12th March 2008 by 12 general insurers are as follows: S.NO. INSURER NO.OF POLICIES TP PREMIUM IN Rs. ( 000) PSUs 1 United India National Oriental New India Private TOTAL ICICI Lombard Bajaj Allianz Reliance General Iffco Tokio Royal Sundaram Cholamandalam Tata AIG HDFC Chubb TOTAL GRAND TOTAL Bimaquest - Vol. VIII Issue II, July 2008

4 Net earned premium of GIC Re for the year was Rs crores. With a total asset base of Rs crores, inherent strengths and skills, strong financials and a net worth of Rs crores, GIC Re is acquiring the status of the most preferred and effective reinsurance solutions provider in this part of the world. GIC of India has also been successfully managing the Terrorism Risk Insurance Pool set-up in April 2002 by Indian non-life insurance companies in the aftermath of 9/11 when the international reinsurance rates hardened. ADMINISTRATION OF IMTPIP The GIC is the administrator of the pool and acting under the guidance of General Insurance Council. For this purpose, the Council has established various committees of insurers. These committees are advising GIC on all issues relating to the Pool. To ensure active participation of the insurers in efficient operation of the Pool, General Insurance Council has appointed the following committees: Administration Committee Underwriting Committee Claims Committee Accounts Committee Investment Committee Statistical Committee Underwriting of the pooled business is strictly in compliance with the procedures, rates, terms and conditions of cover as laid down by the Underwriting Committee of the Pool. The share of GIC in the business underwritten for the Pool account shall be the same share as the percentage share of statutory cessions. The balance share of pooled business will be shared by all other member insurers in the same proportion as the total gross direct premium in India of the insurer in respect of all classes of general insurance business for a financial year bears to the total market gross direct premium income in India in respect of all classes of general insurance business of all member insurers for that financial year. The provisional share of any newly registered insurer in the Pooled business in the year, in which it commences carrying on of business, is determined by the General Insurance Council. Bimaquest - Vol. VIII Issue II, July

5 CLAIM SETTLEMENT STRATEGY The Claims Committee decides on the frequency of settlement of pooled premiums and claims paid. Processing of claims on the pooled business is strictly in conformity with the procedures and limits of authority as laid down by the Claims Committee of the Pool. The accounting year for the Pool is from 1st April to 31st March of the next year. Accounts are rendered on underwriting year basis. The Pool system generates the accounts of the pooled business. The Pool Administrator renders the accounts to all Members at such frequency and within such time as the appropriate Committee may decide from time to time. Any negative balances of the pooled account becomes payable to the pool administrator on demand. In case of delay for more than a week, 1% p.m. interest is levied from the date of rendering the accounts. Call centre has been set up to receive intimation regarding accident to the insured vehicles. In case of commercial vehicle accidents leading to third party claims on any of the insurance companies, the insured / police / hospitals / public or claimants may report the accident to the call center. If the vehicle is registered under the Pool, the call center will intimate underwriting and claims office about the accident. BLEEDING PORTFOLIO Motor portfolio is estimated to account for around 40-45% of the over Rs 25,000 crore of general insurance premiums. Insurers, particularly the nationalized companies, have seen a significant drop in their underwriting profits owing to losses from the third-party segment, where claims ratio is as high as %. Public sector insurers in the past had used more profitable portfolios such as fire and investment returns to cross subsidize the losses. The private sector, on the other hand, had preferred to stay away from the portfolios since it was loss making. Besides, unlike public sector, a few of the private sector non-life insurers had large investment surpluses to cross subsidize loss-making risk portfolios. The new mechanism was considered since almost all non-life insurers have begun avoiding third-party risk cover. Insurers treat this as a bleeding portfolio. This was particularly so in the case of commercial vehicles. Even on fire portfolios, which included natural disasters, floods and cyclones, the claims were high. This year, claims on this portfolio were in the region of about 70 per cent, though traditionally it was in the region of about per cent. This would now mean that insurers would have to capitalize further for maintaining solvency ratio of 150 per cent prescribed by the IRDA. Given this kind of a situation, neither private nor public sector was keen on acquiring loss-making portfolios into their books. SHARING OF LOSSES IMTPIP is a pool of companies that offer third party motor insurance cover. Third party covers i.e. insurance for the driver against personal injury, property damage to other parties, 52 Bimaquest - Vol. VIII Issue II, July 2008

6 are mandatory. But insurance firms were reluctant to take on the business because of low prices and high claims which only translated into huge losses. So, a pool was created to ensure that anyone seeking cover would be given one, while premium would go into a common pool managed by GIC. Currently, insurers make provisions for unexpired losses equivalent to 50 per cent of their incremental premiums. The accumulated reserves for unexpired risks with the four PSU insurers are currently at Rs 6,700 crore. Even private sector insurers have made such provisions in the past, as a statutory requirement. However, some private sector insurers were able to write back the provisions, in view of their low exposure in motor third party liability business. The large transfers to the provisions in the past had impacted underwriting profits of the PSU insurers since technical provisions are treated as above-theline items. INVESTMENT GUIDELINES Currently, non-life insurers in the country are expected to park their investible funds in mandated investments. Under the guidelines, non-life insurers are mandated to park at least 20 per cent of their respective investible funds in central government securities, 30 per cent (including Central govt. securities) in State Government securities, 10 per cent in infrastructure sector and 5 per cent in loans to State Government departments for housing. The remaining funds are allowed to be parked in investments approved by the regulator that include equities and corporate debt. Despite the absence of high yield, the pool was expected to end this year with a surplus with gross premiums exceeding claims. This was against the 200 per cent claims that insurers had incurred on third-party liabilities. This was despite the fact that the average yield on investments of the pool was expected to be 8 per cent as against per cent for the rest of the non-life insurance sector. IMPACT ON SOLVENCY RATIO With investment returns falling and competition intensifying, even public sector insurers began staying away from offering third-party risk covers. This was because large losses on the portfolio directly impacted their solvency ratios, through weakening of their respective capital. Insurers, under the current guidelines, are expected to maintain a solvency margin the excess of the capital and the value of assets over their liabilities of 1.5 times. The solvency margins during the last two years were largely supported by profits from trading in equities. Besides, insurers have shifted to a quarterly reporting of solvency to the IRDA. What also made the situation difficult this year were the losses incurred by the insurers through natural disasters. High retention ratios are a major reason for the discontent among the private sector companies, which had so far kept away from commercial vehicle third party risks. After the statutory reinsurance of 20 per cent, the retentions would still be 80 per cent. Moreover, unlike normal risks, there is no ceiling and consequently no provisions can be Bimaquest - Vol. VIII Issue II, July

7 made. The high claims of close to 200 per cent will, therefore, have to be met directly from the respective balance sheets of the individual companies. DETARIFF EFFECT Today, there may be a surplus, but claims are also likely to come in much later. The surplus is on account of 70 per cent hike in TP tariffs last year and not on account of any claim reduction. It is going to take some time before losses are cut down. Insurers had traditionally parked large portion of their investible resources in short-term government securities for liquidity purposes. The bias for fixed deposits was also to ensure liquidity before evolving investment guidelines for the pool. Insurers adopt conservative accounting practices, where there is considerable over provisioning, in anticipation of claim events. Non-life insurers have traditionally parked 50 per cent of their incremental premium collections as provisions for unexpired risks. This is also partly because in motor risks there is no ceiling on insurer liabilities. There are fixed ceilings for third party risk in aviation and shipping. TARGETTED BENEFITS Motor Pool was created as an integral part of the whole process of removal of tariffs and highest priority accorded to finding a solution for third party covers, especially for commercial vehicles. This has targeted the following aspects: 1. Creation of the pool will help public sector insurers to contain third party liabilities. 2. It was the unanimous view of the general insurers that, as a part of the process of detariffication, a motor pool should be established and through effective management, it should demonstrate that the runaway costs with regard to the settlement of claims could be effectively tackled. 3. The motor pool was formed to take over the third party motor insurance risks of commercial vehicles to solve the problem of companies denying cover to customers on grounds of high claim ratios. 4. The transfer to the IMTPIP would result in reducing losses incurred due to claims settlements on motor third party liabilities. This was because the losses are to split among 14 general insurers in the country, ten of them in the private sector. 5. The benefits would accrue not just from loss reduction and greater retentions. The benefits would also come in the form of lower transfers to technical reserves. The 54 Bimaquest - Vol. VIII Issue II, July 2008

8 technical reserves include Reserves for unexpired losses and provisions for Incurred, But Not Reported risk. Both these are not treated as part of the capital. 6. With the inception of the pool this year, private sector insurers are no longer able to write back as in the past. This may be because the liabilities from the pool are to be shared on the basis of the respective market share. 7. The PSU insurers are also in a position to write back provisions excess provisions into their respective profit and loss accounts and improve their profits. It is also likely to help in improving their underwriting margins beginning from the current financial year. Underwriting margins, a measure of profitability, are expected to be close to 2 per cent this year. THE CHALLENGES The pool is welcome, but the fundamental concerns still remain unresolved. Insurers asked for capping of liabilities in case of third party. Unless that happens, even a pool mechanism is not a solution. Fearing a sharp increase in these rates, if left to the insurance companies, the insurance regulator had decided to keep third-party rates under its control. Unlike other lines of insurance, which were detariffed from January 2007, the regulator went ahead with its own third-party rates across vehicles. At a General Insurance Council meeting, players from the private sector expressed unhappiness over the state of third party motor insurance pool and have sought dismantling it. The pool is expected to collect premium of around Rs 2,700 crore by March-end. And at current estimates, given the administered rates, the losses are expected to be around 150%. There is a need to examine whether this system is actually going to work for the insurance industry and customers in the long run. Besides, in the event of reconciliation, the private sector insurers would also be expected to bring in a proportionate share for meeting the claims, irrespective of the underwriter. This is likely to dent their profitability, especially in a situation when claims settlements continue to remain complicated. The funds available with pool shall be invested by the Pool Administrator in accordance with the guidelines prescribed by Investment Committee. OPINIONS AND SUGGESTIONS Motor pool premium is expected to grow to Rs. 3,500 crore in the current fiscal. However, the pool is likely to run at a loss of Rs. 1,500 crore this year as third-party premium rates on commercial vehicles have been slashed to 70% by IRDA as against a 150% increase sought by the industry. Nine months into the pool s operation, the pool cracked along the public sector-and private sector-lines. Most private general insurers feel the motor pool has outlived its purpose and want an urgent review. It is too early to gauge the benefits, since the pool accounts are to be finalized. The administrators still have to go by the past experience in Bimaquest - Vol. VIII Issue II, July

9 making the provisions. With difference cropping up between general insurance players, the future of the Indian Motor Pool seems to be uncertain. The debate on dismantling the Indian Motor Insurance Pool has invited the displeasure of the Insurance Regulatory & Development Authority, which has categorically stated that it would not entertain at any stage the removal of the pool. IRDA s letter has left insurers in a quandary and no company is willing to go on quote on the contentious issue. The Chairman has requested all the insurers to come together to find out how best commercial third party motor portfolio can be effectively managed. A veiled implication from private players of public sector inefficiencies getting transferred to the pool has left public sector companies grumbling. The existence of the motor pool allowed all companies to write third-party premium of commercial vehicles. Earlier, when there was a supply-side constraint, the pool s existence was justified. The management of the pool and reporting of data, both from the premium and claims side, remain a crucial issue. There are some opinions and suggestions 1. The pool would have an adverse effect on their balance sheet and it would be difficult to accurately quantify the pool s impact. 2. There is need for measures to reduce number of un-insured vehicles and increase the premium base available to support the losses. 3. Most private players believe the pool has outlived its purpose and want a complete review. And, unlike earlier, there are no complaints of insurance denial now. 4. Some private insurers feel the pool would be a strain on their respective balance sheets. 5. Some private players even called for a timeline to dismantle the pool. They feel there is no need for a pool now as companies have actively started underwriting commercial vehicle businesses. 6. Private Insurers have suggested scaling down the pool to a decline risk pool from April Other suggestions included re-making the pool into a claims vertical and a separate company. The public sector insurers, however, want the pool to stay, as they would not be able to write all types of commercial vehicle third party policies without the pool arrangement. Motor Pool is an integral part of the process of removal of tariffs to find a solution for third party covers, especially for commercial vehicles. The write-back of excess provisions also help the PSU insurers to buffer themselves from the current weak insurance markets characterized by an over 70 per cent drop in tariffs after migration to deregulated regime. 56 Bimaquest - Vol. VIII Issue II, July 2008