Motor Insurance Business – A bleeding portfolio worsening after liberalization

The origin of Motor Insurance began in 1895 in England. It is surprising to note, when he motor vehicles started its operation, General Insurance Corporation was the first company to transact motor insurance business after the World War I, there was a considerable increase of motor vehicles in all the countries, resulting in increase in number of Road accidents.

General innocent people were dying due to road accidents. This lead to implementation of compulsory Motor third party insurance in England and Road Traffic Act, 1930 was passed and some additional amendments in 1934 followed by comprehensive third party insurance by Road Traffic Act, 1960.

In India Motor Vehicle Act was passed in 1939 containing the law relating to compulsory third party insurance and subsequently revised to Motor Vehicles Act, 1988 and thus amended from time to time.

Whilst implementing Motor Vehicles Act a comprehensive motor vehicles package policy was also introduced covering loss and/or damage to motor vehicle.

It is necessary to concentrate on the claims arising out of loss and/or damage to motor vehicles as the loss minimization measures start from the date of intimation of such claims. To understand this aspect, it is necessary to understand the motor vehicles insurance.

What is the purpose of introducing the Motor vehicle Insurance?

Motor vehicle insurance is the insurance of vehicles driven on the public road and/or places by use of its engine/horse power run by diesel/petrol and/or LPG or CNG gas.

Whilst driving, if the vehicle meets with an accident, not only the vehicle is damaged but also third party i.e. general people walking on the road sustain injuries which may lead to death of such people or disablement or injuries for which motor vehicle owner or driver is responsible. Invariably owner of the vehicle is not in a position to compensate such losses. Hence it became mandatory for the insurance of motor vehicles.

Motor vehicle Insurance is classified into following categories.

i)      Two wheelers (Motor cycle/scooter)

ii)     Private cars

iii)    Commercial vehicles.

Commercial vehicles category is subdivided into four groups.

i)      Goods carrying vehicles (Own goods with private carrier permit)

ii)     Goods carrying vehicle (General cartage with public carrier permit)

iii)    Passenger carrying vehicles.

iv)   Miscellaneous type of vehicles viz. Agriculture tractors, Ambulance, Publicity Van etc.

Motor Insurance contracts are governed by the basic principles applicable to property and liability insurance in general viz. Utmost Good faith, Insurable interest, Indemnity, Subrogation and contribution and proximate cause. Since these principles are common for all contract of insurance rather akin to Sale of Contract Act, explanation of these basic principle are not required.

Type of Motor policies

The revised Indian Motor Tariff which came into effect from 1st April, 1990 provide two types of policy forms:

i)    Form ‘A’      -    Covers “Act Only Liability”

ii)   Form ‘B’      -    Covers “Own Damage” losses and Third party liability.

Third party liability is extended cover, covering additional liabilities as provided in the tariff. For e.g. Liabilities to insured and spouse, liability to employees and passengers including non paying fare passengers, Workmen’s compensation to paid drivers, cleaners, coolies, Personal Accident to insured and family members including passengers however personal Accident to owner of the vehicle is compulsory if he is the insured.

Scope of Standard form for Private Car, Two wheelers, and Commercial vehicles are more or less same except the limit of indemnity in respect of Authorization for repairs, Protection and removal cost, compulsory excess, drivers’ clause and other discounts, endorsements differ in each class of vehicles.

Under Section – I, loss and/or damage to vehicle arising out of accident and/or theft are provided in the terms, conditions, clauses, exclusion of the Motor vehicles Insurance.

Specified risks covered are as under:

a)    by fire, explosion self-ignition or lightning;

b)    by burglary, housebreaking or theft;

c)     by riot and strike;

d)    by earthquake (fire and shock risks);

e)     by flood, storm, typhoon, hurricane, cyclone, tempest, inundation, hailstorm, frost;

f)     by accidental external means;

g)     by malicious act;

h)    by terrorist activities;

i)      whilst in transit by road, rail, inland, waterway, lift, elevator or air;

j)     by landslide/rockslide.

Loss or damage to accessories are covered if the accessories are on the motor vehicle. It should be noted that radiator, tape recorder, air conditioner and other electric or electronic items etc. which are fitted by motor car owner will not be considered as accessories but the same can be covered as extra fittings by additional premium and shown separately in the schedule of the policy.

The premium ratings are governed by Indian Motor Tariff for each class of vehicles based on insured declared value, Cubic Capacity or Gross Vehicle Weight, Geographical Zone etc. Motor vehicles insurance were governed by General rules and Indian Motor tariff.

Motor vehicle insurance business is generally considered to be an unprofitable class of business. In the recent years the claims experience has shown signs of worst deterioration. With the increase in number of vehicles, traffic density, high cost of labour and spare parts control on the claims cost is essential. It is, therefore, necessary that underwriters should be prudent and underwriting approach should be selective and analytical.

Manufacturers of motor vehicles are increasing in India and introduction of vehicles with different cubic capacity with improved speed, and other fittings inside and outside, and of various models, motor vehicles prices have also gone up considerably.

With the rapid increase in vehicle population, Road accidents were also increasing at an alarming rate. Prior to liberalization, Loss Prevention Association of India held various workshop programme with the Regional Transport Office and Municipal corporation to highlight the need for educational training to drivers/owners at the time of obtaining driving licence and also need for safe and roadworthy conditions.

Much efforts were taken by the Loss Prevention Association of India to control the claims ratio under this department and this certainly yielded positive results. But accidents are inevitable, however, with the due diligence and care most of the accidents can be avoided. Fear should be instilled in the minds of the driver/owner of the vehicle that dangerous and negligent driving will be subject to severe punishment with jail and/or penalty or both depends on the nature and cause of accident.

It also should be noted that underwriters of the motor vehicle insurance should adopt sound and prudent underwriting to control the claims ratio, which is possible only if underwriters are given liberty to exercise their powers. With great efforts, certainly there was marked improvement in the Motor Own damage claims.

Motor Insurance business constitute 30% of the total gross premium and it is very essential to promote growth vis-à-vis control on the claims. Even if it is possible to detect fraudulent claims and assess the loss reasonably, claims ratio can be drastically reduced. This was happening prior to liberalization. Cashless facilities were given to valued authorized dealers with a close monitoring on the dealers business was also kept.

But now with the liberalization and privatization of general insurance, all such loss minimization measures have gone with the wind. Price war, aggressive marketing, Unhealthy practices were perpetrated by the insurers to grab these business. Even premium rates were reduced by allowing discount to the extent of 40 to 60%, Giving commission to dealers to the extent of 25 to 35%. The changed scenario not only increased the claims cost exorbitantly but also reduced the premium income considerably. Who are responsible for these irreparable losses?

IRDA, having opened the insurance market to private insurers, have not monitored the business activities of the insurers. No Loss Prevention measures, no proper underwriting, no checks and balances over the nefarious activities of the insurers have lead to drastic increase in the claims ratio and decrease in the premium income. It is needless to utter that this portfolio is a bleeding portfolio. Unless there is strict control over the business, portfolio is certainly to bleed.

On the other hand Auto Tie-ups with the dealers increased dramatically. There is no selection of the dealers. All the dealers get cashless facility and they have choice to select their own insurers and started dictating terms with the insurers. Prior to liberalization, these dealers used to go with the begging bowl to the insurers for all such facilities. But with the entry of 17 private insurance companies, control over this portfolio reduced to a greater extent and price war, stiff and aggressive marketing allowed the auto dealers to rule the roost.

Who are enjoying and at what Cost?

Certainly dealers and the owner of the vehicles are enjoying at the cost of the insurers. But this was not case with the commercial vehicles. The private insurers were less keen to insure commercial vehicles as this class of vehicles are highly loss making ones. But thanks to IRDA, who have dictated to the insurers for compulsory insurance of these vehicles for atleast third party cover.

With this unhealthy and competitive scenario, Motor insurance business have become worst affected. Although this will not last long, certain corrective measures have to be taken by IRDA to streamline this portfolio and bring a feasible solution to sustain this business.

 

“Time is the best healer,

and it applies to both the insured and insurer

for healthy and progressive business, both the

concerned parties should strive hard

to maintain honesty and transparency in dealing

with this bleeding portfolio.”

By: P. V. Sethu, Dy. Manager, New India Assurance Co. Ltd., Grievance Cell, Head Office, Mumbai, Published in The Insurance Times, November, 2011