General insurance companies have put a proposal in front of the Insurance Regulatory Development Authority (IRDA) to bring down fraudulent third party claims and cut losses.
As per the proposal, the insuree at the time of taking insurance shall be required to mention the names of all the people who would be driving the vehicle. In the event of an accident the insurance companies will be held liable for the claim only where the vehicle is driven by any of the persons mentioned in the list provided at the time of buying the policy. Meaning thereby if any person, other than that mentioned in the list, is driving the car, the claim would be rejected. Also, the insurance premiums will go up depending on how many names are mentioned in the list.
This may pave a way to the general insurance industry to boost their profitability as the industry is nowadays facing losses due to the either fake third party insurance claims or poor underwriting standards.
Insurance underwriting is primarily based on the analysis of claim experience by different portfolio sectors that relate to premiums and exposures.1 It includes how much coverage should be given to the client, how much premium he would pay for it, and whether the company should even insure the person. In underwriting, eligibility of customer to receive the insurance is analyzed. It involves measurement of risk of giving a client a policy and the rate at which the company should charge the client for that risk. This is a difficult task as current data is to be used for future use and the time period for which the data can be used is tough to determine or speculate.
There has been an increase in fake third party claims in the last few years. These fake claims cost insurance companies 10-15%2 of the premium incomes.
In the year 2010-11, incurred claims ratio of motor insurance was 102.69%3 compared to 84.51%4 for the year 2009-10. The loss ratios will be 213% for the current year, meaning thereby, for every Rs. 100 premium earned by the insurance companies, they would be paying Rs. 213 as claims.5 The finance ministry has asked Public Sector Undertakings to increase motor insurance premium to minimize their third party motor insurance losses. The losses of the state-run general insurance companies was Rs. 87, 604 crore6 for the year 2010-11 as compared to Rs. 85, 5017 for the year 2009-10.
In the exposure draft on Insurance Regulatory and Development Authority (Places of Business) Regulations, 2012, IRDA has proposed to make it compulsory for insurance companies who have completed 10 years of business to open not less than 25% of its new places of business in places having a population of less than 1,00,000. IRDA has asked to increase the presence of insurance companies in the rural areas. The insurance companies are condemning this move saying that there is no business opportunity in the areas with less than 1,00,000 population. According to IRDA, non-life insurance penetration in the country is 0.7%8 of the Gross Domestic Product.
Insurers have said that underwriting is difficult as they don't have external source data of customer behaviour. Various factors come into picture whilst underwriting such as, driving violations, driving history, accident claims history, vehicle maintenance, credit rating of client, purpose for which vehicle is to be used etc., as no external data source to verify driver behavior is available in India, it is difficult to determine premiums of customers.
Now, the insurers are thinking about using the data from the credit bureaus, Regional Transport Office, and police record to determine the insurance premium of their clients. Even CIBIL is in talks with the insurance companies to share its data with them so that they can use that data to decide the premium prices for new and prospective customers. CIBIL is also in process to approach IRDA with this, who is considering having a separate credit bureau for insurance.
Government of India is also proposing a separate Motor Vehicle Insurance and Compensation Legislation regarding the increase of third party premium, fixing the third party claim, obligatory underwriting of third party risk, delay in claims, compensation amount, fraudulent claims etc. The Motor Vehicles Act does not prescribe any claim limit for motor accidents, whereas the Motor Vehicles (Amendment) Bill suggests a cap of a maximum compensation of Rs. 10 lacs by the insurance company. Anything more will have to be paid by the owner.
Though IRDA, in March, had notified a 5-20%9 increase in the motor third-party premium applicable from April 1, 2012, the Calcutta High Court quashed it in June10 after transporters11 filed a writ petition in the court.
Whether the IRDA would approve these proposals is the big question. If this proposal becomes a reality, it would create havoc for the common man and would be downright harsh. The Indian society is such, where neighbours borrow from neighbours things, from sugar to cars. Anyone with a valid driving license can borrow a relative's or friend's vehicle. How exhaustive can a customer make his list? Increase in number of people in list also increases premium. Asking a person to make a restricted list about who can drive his car is unreasonable.
Motor insurance contributes to one third of the premium income for the non-life industry. Also, it has been experiencing losses and has a high ratio of claims payment. But shifting its failures to the shoulders of the policyholders by charging them with an increased premium and restricting them is not the way to boost itself. Insurance companies should work towards enhancing and improving its underwriting standards and research methods rather than putting the burden of their losses on the innocent customer, who already pays high premium rates.
IRDA's job is to make sure that the customers don't get trampled on by the insurance industry. It should work towards protecting the customers and regulating the industry in a way which best serves the customers.
Footnotes
1 http://www.insfocus.com/insurance-content/underwriting.html
2 http://www.ibisworldwide.com/news/insurers-struggle-to-fight-fake-claims-m.aspx
3 http://www.irda.gov.in/ADMINCMS/cms/Uploadedfiles/IRDA_Handbook_2010-11_Full_Report.pdf
4 ibid
6 http://www.irda.gov.in/ADMINCMS/cms/Uploadedfiles/IRDA_Handbook_2010-11_Full_Report.pdf
7 ibid
9 supra note 5
10 Asansol Mini Bus Association & Anr. v. Union Of India & Ors (2012) 3 CAL LT 456 (HC). Decided on June 14, 2012.
11 Asansol Mini Bus Association and Federation of West Bengal Truck Operators Association
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