The Hon’ble Supreme Court of India (in the matter of WP No.295/2012 of Shri S. Rajaseekaran vs Union of India and others) has, vide its order dated 20th July, 2018 stated “We make it clear that the third-party insurance cover for new cars should mandatorily be for a period of three years and for two-wheelers, it should mandatorily be for a period of five years. This may be taken and treated as a separate product. The decision should be implemented from 1st September, 2018 on the policies sold.”
The concerned bench of justices MB Lokur and Deepak Gupta also directed Insurance Regulatory and Development Authority to approve the insurance product as soon as it receives it from the General Insurance Council.
The General Insurance Council sought eight months’ time to prepare the desired product but the court did not accede to this request and asserted “issue raised by the panel was of utmost concern”. It ordered insurance companies to compulsorily offer third-party insurance as a standalone product and not jointly provide it under a comprehensive policy.
Why long-term TP Insurance is being made mandatory?
The Order of the Supreme Court has come as a result of a PIL filed before the Court seeking a direction against all states and union territories for implementing measures for improving road safety. The concerned bench of justices MB Lokur and Deepak Gupta which has been hearing a PIL had appointed Justice Radhakrishnan Committee on Road Safety to look into measures for preventing road accidents and improve accountability.
After holding detailed discussions with the IRDAI, General Insurance Council, Ministry of Road Transport and Highways and Department of Financial Services, Ministry of Finance, and the Government of India, the Committee on Road Safety in its meeting of 26th March 2018 had recommended that, inter alia, it should be mandatory for all General Insurers to issue third party insurance covers for three years and five years, for cars and two wheelers respectively, at the point of sale and registration.
This recommendation was forwarded by the Committee after it was found that out of 18 crore vehicles registered in the country, 12 crore (67%) are uninsured including heavy traffic vehicles. “50% of the uninsured vehicles are two-wheelers and statistics also reflect that maximum number of accidents are caused by these vehicles.”
As per the report of the Committee “longer term third-party insurance cover at the time of purchase would ensure that the road accident victims do not suffer due to the fault of the owner in not renewing his or her policy every year.”
The plight of the mishap victims must have been in the mind of the bench which not only observed that the recommendations of the Committee were reasonable but also asked the Committee on road safety to submit a report on how to compensate adequately the people who are killed in accidents caused due to potholes on roads. “This is frightening and a very serious issue. People who have lost their lives as a result of accidents caused due to potholes should be entitled to compensation. After all it happens due to the negligence of civic authorities,” Justice Lokur said.
Swift action by the Insurance Regulator:
The Insurance Regulatory and Development Authority of India (IRDAI) has issued a circular dated 28-08-2018 in this regard. The circular said general insurers should “offer only three-year Motor Third Party Insurance covers for new cars and five-year motor Third Party Insurance policies for new two-wheelers”. The circular further says that in line with the decision of the Supreme Court, all general insurers (except stand-alone health insurers and the specialised insurers) would carry out the instructions given in the aforesaid circular in respect of Motor TP Insurance covers for new cars and two-wheelers with effect from 1st September, 2018. At present, third party cover is mandatory under law (Motor Vehicle Act) but is offered only for one year.
Guidelines about Modalities for introducing the product in the market:
IRDAI has issued detailed guidelines vide its aforesaid circular for the new range of products. The main guidelines are as under:
1. The insurers must offer only three-year Motor Third Party Insurance covers for new cars and five-year motor third party insurance policies for new two-wheelers.
2. The full premium has to be collected for the entire term (three years or five years as the case may be) at the time of sale of insurance but would be recognised on a yearly basis – that means it shall be accounted for each year as 1/n of total premium as Gross Written Premium during that year where ‘n’ is the term of the policy. Thus, the premium for the year shall only be recognised as income and the remaining premium shall be treated as “Premium Deposit” or “Advance Premium”.
3. No Motor Third Party Insurance will be cancelled except on the following grounds:
a. Double Insurance
b. Vehicle not in use anymore because of Total Loss or Constructive Total Loss
c. In the event the vehicle is sold and/or transferred
4. It would be sufficient if the insurers file a Letter of Intent signed by the CMD/CEO, with IRDAI in the prescribed format through e-mail and follow it up with a physical copy for records. A Unique Identification Number (UIN) will be allotted to each product immediately on receipt of letter of intent, which will be filed before 30th August, 2018.
5. Insurers shall ensure that third party insurance cover is available to all proposers through online channels as well. They shall also liaise with the police authorities to facilitate issuance and renewal of third-party insurance cover and ensure its easy availability.
6. No Claim Bonus would be applicable on OD component only when the policy term has been completed.
7. Insurers shall advertise about the introduction (including the mandatory nature) of the long-term motor third party insurance.
Currently (before 1st September) as far as Motor Own Damage Insurance is concerned, Package Policies (i.e. comprehensive covers) are available wherein two components are covered-Motor Third Party Liability and Motor Own Damage cover. After the introduction of mandatory long-term Motor TP Insurance for new cars and new two-wheelers, an insured may be given the following two options:
A. Long-term Package cover offering both Motor Third Party Insurance and Own Damage insurance for three years or five years as the case may be.
OR
B. A bundled cover with a three-year or five-year term (as applicable) for the third-party component and a one-year term for the Own Damage.
Guidelines on Pricing:
IRDAI has issued following guidelines on pricing for the new products.
About pricing the new product, the regulator has been given much need breather to the insurers. The circular says “Insurers may price the Own Damage component of the long term package covers suitably, in line with their current approach for pricing. Given the immediate need to offer long term package covers, insurers may start issuing such policies effective 1st September, 2018 even while ensuring filing such products under the File and Use Guidelines before 15th September, 2018.”
If the IRDAI finds the pricing approach in variance from their general pricing philosophy/approach for Motor Own Damage and not in line with actuarial principles, suitable direction may be issued by the regulator. So far as pricing of the one-year term component of the OD part of the bundled product, it shall be the same as in existence for the OD component of package policies currently.
The long-term premium rates for a three-year Motor TP policy-private cars not exceeding 1000 cc sold during the period – 1st Sep 2018 to 31st Mar 2019, is fixed at Rs 5286.For a vehicle exceeding 1000 cc but not exceeding 1500 cc, the premium is charged at Rs 9, 534.Similarly, for a vehicle exceeding 1500 cc, the premium is fixed at Rs 24,305.
For a third-party two-wheeler policy, not exceeding 75 cc, the premium will be at Rs 1045, while for a two-wheeler, exceeding 75 cc but not exceeding 150 cc, it will be Rs 3285. For a two-wheeler, exceeding 150 cc but not exceeding 350 cc, the premium will be at Rs 5453.For a two wheeler, exceeding 350 cc, the premium will be at Rs 13.034.
The impact of the mandatory long-term Motor TP insurance
- Mishap victims will be the main beneficiaries of this step which is expected to help road accident victims recover compensation from insurance companies, without going after the owner of the offending vehicle.
- The problem of uninsured vehicles is acute as of now (67%). In the absence of insurance, the owner of the vehicle is liable to pay the award amount. But all claimants and their lawyers know that while the insurer will certainly satisfy the award, either in the first instance or after the decision on the appeal whereas the owner and driver may not have the means to do so. Even if they do have the means, getting an award executed against individuals is much more difficult, time consuming and costly affair as compared to that against the insurer. Therefore, many of such cases get filed against a vehicle which is insured. It is widely believed in the industry circles that such substitution of vehicles takes place with the active connivance of police (not in general). So even as the insurers lose out on the premium of the uninsured vehicles, they are nevertheless financially hit by the invalid claims arising out of the third party accidents caused by uninsured vehicles. This has been one of the major reasons for the phenomenally high incurred claim ratio of Motor TP portfolio for so many decades in India. The scheme of mandatory long-term policy will curb not only the menace of uninsured vehicles but prevent such invalid claims also and as a result, by all probability, the premium rates may come down after few years. Presently honest customers are paying abnormally high premium because of rampant fraudulent/invalid claims owing to huge numbers of uninsured vehicles.
- The insured will be able to avoid an unwanted situation wherein he may have to pay a huge amount of compensation to the mishap victim’s family in case of accident taking place after nonrenewal of insurance owing to omission or otherwise.
- Long-term premium payments would proportionately raise the initial outgo on new vehicles, but save consumers from the hassles of renewals every year. The insurers will be bound to ensure that third party insurance cover is available to all proposers through online channels as well for the convenience of customers.
- Insurers will be benefited by way of reduction in lapse ratio (of renewals) and enlarged motor portfolio. Penetration in the motor insurance portfolio will improve in near future.
- As vehicles age and depreciation accelerates, many owners tend to skip annual renewals but this initiative will certainly go a long way in reducing lapse ratio.
- As the general insurers will also liaise with the police authorities to facilitate issuance and renewal of third-party insurance cover, there will be fruitful coordination between the insurers and police department in the future.
- This step will be more beneficial for those insurance companies who have already strategic alliance with passenger car and two-wheeler manufactures/dealers and therefore some of the private insurance companies like Bajaj Allianz, ICICI Lombard, Bharti AXA General Insurance and HDFC Ergo General Insurance Co. will benefit the most as, of late, these companies have been very aggressive on building such alliance (tie-up).
Conclusion:
Introduction of mandatory long-term Motor TP insurance is a well thought step in the right direction which will address a multitude of problems faced by not only by the insurance industry but also other stakeholders – mainly the mishap victims. Insurers have welcomed the move and say that the industry had been preparing for it since the Supreme Court ruling came. According to Mr. Rakesh Jain, CEO, Reliance General Insurance, this is a positive development as many owners forget to renew their policies after one year. By and large, other stakeholders – the insureds, intermediaries and public at large have also appreciated the move.
References:
Several contemporary discussions and information as gathered and collated from various text materials online and hard copies.
