With all the four government-owned general insurance firms incurring significant underwriting losses under the third-party motor insurance segment for commercial vehicles, the Department of Financial Services has asked them to be more prudent and cautious in underwriting motor business by devising a proper strategy so that their losses can be minimised further.
Following the discontinuance of the Third Party Motor Pool and the same being replaced with the Commercial Vehicle Third Party Insurance Declined Pool from April 1, 2012, the situation is expected to worsen further.
In a letter dated July 30, the Finance Ministry has directed these insurers to be more realistic in pricing comprehensive motor insurance policy so that the combined ratio including claims and commission does not exceed 100%.
“For cases where combined ratio is less than 1, the operating offices shall be authorized to allow reduction in premium for commercial vehicles as compared to the old tariff rates, up to a maximum limit of 10%. The controlling regional offices may be given an authority to increase their discount to a maximum of 20%,” the letter says.
Combined ratio is a measure of profitability used by an insurance company to indicate how well it is performing in its daily operations. A ratio below 100% indicates that the company is making underwriting profit while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.
For vehicles older than seven years, the ministry has asked the four general insurance companies to charge rate according to the Indian Motor Tariff 2002 rates and in such cases the commission/brokerage shall be restricted to 5% of premium. No brokerage/commission shall be payable for vehicles of more than 10 years of age.
“The premiums for motor insurance may rise by 40-60% after these four companies start applying these guidelines,” an official of United India Insurance told Express. In 2011-12 fiscal, these general insurance companies clocked losses to the tune of `6,134 crore with a major portion of it coming from motor insurance portfolio.
The ministry has also discouraged the insurers not to undertake any business from dealers, manufactures and financiers placing bulk motor business with heavy claims ratio.
“Restrictions may be placed on offices in certain geographical areas from granting comprehensive policies in respect of such line of commercial vehicles which are otherwise required to be ceded to the Declined Pool,” the letter adds.