Another case of insurance regulation – good or bad?
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Motor insurance is the only insurance product in India mandated by law. This means that any one owning a vehicle is bound under the Motor Vehicles Act, 1988 to have a third-party motor insurance policy.
Clearly then, this product is an important contributor to the business of general insurance companies. As a result of the late privatisation of the insurance sector, there seems to be an underlying rift between public sector and private sector insurance companies. Public sector insurers have had ample time to capture the market, while the late entrants are still struggling to make their mark.
One critical issue in the insurance industry is the much debated third-party motor insurance pool. The motor pool, operational since April 2007, is a corpus of premiums gathered from all general insurance companies, and this corpus is managed by the General Insurance Council.
As a rule, every player must mandatorily contribute to this pool depending on their market share, irrespective of the underwriting done by them.
Although the regulation of tariffs in the general insurance space was withdrawn in 2007, third-party motor insurance continues to be regulated. Owing to huge losses in the motor insurance segment, companies have been demanding an increase of around 150 pct in the premiums. However, in April 2011, the regulator rolled out a hike in the range of 10 to 65 pct in an attempt to provide some relief to insurance companies.
Even so, private insurers are nearly asphyxiating because of the motor pool. Public insurers like New India Assurance own a greater market share and are alleging that they are being asked to contribute disproportionately to this pool and are knocking on the regulator’s door to do away with the motor pool altogether.
According to the regulator, the ultimate loss ratios for the years 2007-08, 2008-09 and 2009-10 were 172.3 pct, 181.81 pct and 194.15 pct respectively. Against this estimate, the pool had maintained reserves at 126 pct. Earlier this year, the regulator directed all pool members to make a tentative provision of 153 pct for each of the 4 years from 2007-08 to 2010-11. This extra provisioning created a dent in the earnings of general insurance companies. The 10,250 crore rupee hit that these companies took last year, on account of commercial third-party motor pool losses, is still reverberating.
According to ASSOCHAM, motor insurance business will continue to remain the largest category, contributing to over 40 pct of industry premiums. By 2020, India will become the third-largest car market globally with over 7 million cars sold annually, which will further drive growth in motor insurance segment. Therefore, it is not surprising to see the buzz around this revenue contributor.
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