BLEEDING MOTOR PORTFOLIO ( GENERAL INSURANCE )

Nowadays every General Insurance Company is talking about bleeding motor portfolio and coming out with emphasis on restricting motor portfolio and to increase in other portfolios and adopting various strategies, for example:

1. Avoiding granting Third Party insurance, although compulsory by statute.
2. Imposing excess in loss – the prone type of vehicles without any discount in premium (No provision as per tariff).
3. Imposing excess in commercial vehicles even though without any claim history, again without any discount in premium (No provision in tariff).
4. Advising to cover the gap in loss of motor premium by way of advocating Personal line of insurances without going into the scientific analysis of these insurances as far as premium rates and the probability of claims are concerned and industry has already burnt its fingers given some personal line of insurances in the absence of such data and analysis and even resorted to cancellation of policies.

Whereas it cannot be denied and it remains a fact that :

1. Still, the motor portfolio is a major contributor to total general insurance business underwritten in India i.e. app. 40%
2. It is the motor insurance by which the general insurance industry is mostly known to the common masses
3. a) As the majority of India’s population even middle class remains in rural areas/ towns/mufassils areas and two-wheelers / four-wheelers have not remained a luxury but have become a way of life
4. b) Compulsory nature of statutory requirements for third party insurances once you own a vehicle
5. c) General Insurance still not being on the priority list of the masses as compared to other compulsions/requirements / financial constraints
6. d) Motor claims being majority claims bringing the insured masses in contact with the insurers and giving a chance to judge the customer services being provided by the insurers.
7. The motor insurance business is still underwritten in India as per Motor Vehicle Tariff as there is no provision as yet to underwrite this class of business violating Motor Vehicle Tariff.

So looking to the above facts, General Insurance Industry should think seriously that in the changing scenario of liberalization, globalization, and customization [Customer is the Supreme] that it will not be feasible to sustain avoiding Motor Insurance Business but rather should ponder upon to underwrite this business on commercial basis i.e. premium rates to be commensurate with loss experience after analyzing the reasons in detail about high incurred loss ratio in the industry as a whole instead of taking measures in haste that may lead to alienate masses by way of general impression being carried out of avoiding motor insurances by insurers and will affect the procurement of other classes of business also in the long run.

So it is presumed that in the absence of sufficient and accurate database & methods of analyzing different aspects of claims and lack of reasoning on a scientific basis in certain decisions in the past has also affected the portfolio as it is the common fact that the removal of depreciation clause in two-wheelers/four-wheelers with an increase of some marginal premium was not a right step looking to the ground realities like difficulty in excluding wear and tear losses, expectations of insuring public and the prevailing social culture, etc. and ultimately Industry has to withdraw this provision. Similarly, the introduction of malus clause has also not helped much in reducing the losses and again Motor Tariff has been revised last year and a few new concepts have been introduced which again ultimately are going to have a bearing on the portfolio in the years to come, such as :

1. IDV AS SUM INSURED: Insured declared value which is to be fixed based on manufacturers listing price of the brand and model but will it be possible to find out such price of 5 years of all types of old models of various types of vehicles everywhere and similarly the value of the certain type of vehicles going down abruptly as it has happened in case of Cielo cars and Matiz cars etc.
2. TOTAL LOSS CLAIMS: At the time of claim, vehicles will be considered to be a Constructive Total Loss only if the aggregate cost of retrieval and/or repair of the vehicle subject to term and condition of the policy exceeds 75% IDV which means up to 75% of the IDV claim will have to be settled on Partial Loss Basis only, will it not be a costly affair.
3. INSURANCE OF BRAND NEW VEHICLES: Even brand new vehicles will be insured after applying 5% of depreciation, will it be fair to the owners as that will be the only insurer’s liability even if the loss has taken place immediately after purchase and insurance of the vehicle.
4. RATING: There is the provision of loading in tariff provision rates by a hundred percent for adverse claim experience but no defining of adverse claims experience in the tariff.
5. UNLIMITED THIRD PARTY PROPERTY DAMAGE: Previously Third Party Property Damage used to be covered to the extent of Rs.6000/- as part of basic risks with provision for an increase in this limit by payment of additional premium whereas now it is increased to straightway Rs.7.5 lakhs.
6. COMPULSORY PERSONAL ACCIDENT INSURANCE OF OWNER/DRIVER: Premium being Rs.50/- for one lac cover and Rs.100/- for two lac cover depending upon the type of vehicle, will it not be a costly affair and further add to the loss ratio as even one casualty in 2000 cases will wipe out the entire premium.
7. NCB CONFIRMATION: NCB confirmation can be given only based on a declaration by the insured in the absence of any proof which can be confirmed at a later stage whereas the experience of NCB confirmation at a later date so far has not been very satisfactory and also resulting into loss of premium
8. Exhaustive Proposal Form: No doubt proposal form is a must in underwriting in all classes of business, but exhaustive Proposal Form as introduced as per tariff will remain a problem keeping in view the literacy level of the majority of the masses.

So, the need of the hour is to analyze the reasons for the high incurred loss ratio so far and consequently the remedial steps to be taken instead of restricting the motor insurance portfolio. Further, the reason for the high incurred loss ratio in Motor OD and TP portfolio can be attributed to the following reasons on a broad basis.

1. Congestion on roads.
2. Quality of construction of roads.
3. The high rate of accidents due to lack of awareness/non-observance of traffic rules and the way the   D/Ls are made.
4. The monopoly of dealers/repairers of costly new generation vehicles and rates being charged for their parts and labor.
5. Use of lightweight parts (with plastic components) and availability of parts as a complete assembly only although only a part is damaged.
6. Leakage to some extent several agencies are involved.
7. Roadworthiness / general maintenance level of vehicles being insured.
8. Availability of spurious spare parts in abundance.

MOTOR THIRD PARTY

1. Limited defenses are available to the Insurance Companies.
2. The liberal attitude of courts. Third-party insurance/claim being considered as one of the means of social security.
3. Unlimited liability which we understand is not there even in many developed countries.
4. Leakage in the shape of some hit and run cases being converted into MACT Cases and in connivance between claimants and owners of the insured vehicles.
5. Handling of MACT Cases by persons without legal background and dependency on outside agencies such as lawyers which are third parties.
6. Application of the second schedule in MACT Cases which is not a clear document, being interpreted differently by different courts.

So, keeping in view the above factors, it is the need of the hour to ponder upon the following points and to come out with a solution instead of adopting restricting measures.

1. Are our rates fixed based on the principle of sharing of losses depending upon the claim experience? As the industry as a whole is having a continuously high incurred loss ratio for years together and things, on the whole, cannot be presumed to be bad leading to high incurred loss ratio and exceptions are everywhere our industry being a part of society and of the social environment.
2. Cant it be taken with the manufacturers in respect of improvements in parts that are generally affected and are available only as an assembly?
3. Fixing of rates of cost of Y2K paints as in many cases the cost of the painting is exceeding the entire cost of labor etc.
4. Fixing of the age of vehicles to be insured because of the Motor Vehicle Act and its incorporation in the tariff itself.
5. Similarly in MACT Cases, should matter be not pursued with the Govt. to fix the liability on a limited basis or to subsidize the losses.
6. There should be some contribution to the award from the insured/driver in case of negligence on their part.
7. Clearcut guidelines about the age of the vehicles to be insured decided upon after consultation with the various agencies, insurance companies, transport departments, automobile associations, etc. and the rate to be charged accordingly.

In short, we can say that if we can find a suitable solution to the real problem of higher losses in the motor portfolio, it can rather help us in increasing other portfolios also, by exploiting our relations with the clients through motor insurance, which is so far most common class of General Insurance business known by the insuring masses.

By Dr. A. K. Gulati, Published in The Insurance Times, May 2004