SC order to bring down gap between vehicle ownership and insurance

Vehicular collisions kill about 150,000 every year in India
A Supreme Court order makes it mandatory for car owners to have an extended third-party (TP) insurance of two years from September 1; owners of two-wheelers have to buy a five-year term policy. The Mother Vehicles Act and the Insurance Regulatory and Development Authority of India (Irdai) have made motor TP insurance mandatory. This cover provides security in case a bystander is injured or dies in a road mishap or if a vehicle owned by other party is damaged. The policy provides the policyholder with a sum assured in case they injure a third party; also, the sum assured is a guarantee of compensation for victims. 

At present, car owners can only purchase a one-year motor TP policy, which has to be renewed. Two-wheeler owners may choose to extend their policy by up to three years. Most new vehicle buyers today buy a comprehensive policy that compensates for TP liability and own-damage, say insurance executives. 

“We are still awaiting the full text of the SC order but I believe it will address the issue of under-insurance in the motor segment, as the gap between the number of vehicle on the roads and insurance policies is  almost 50 per cent.,” says Rakesh Jain, chief executive officer at Reliance General Insurance. 

By mandating and extending the minimum term of motor TP covers for all vehicle owners, the direct effect on insurers will be a larger customer base and growth in overall premium revenue for the segment. 

Puneet Sahni, assistant vice-president for product development at SBI General Insurance, told Business Standard, “Now that the duration is going to increase from three to five [one to two years in the case of cars], there will be saving on account of administrative expenses and insurers will have investment income for a larger time period.”

Adding: “This gain needs to be passed on to the ultimate customer. I am expecting the regulator to come up with indicative premiums for five years, because if everyone starts passing on as per own experience and data, it could create another problem.” 

Experts say only 45 per cent of motorcycles and scooters are insured and so are 70 per cent of cars. It is estimated that vehicular collisions cause the death of 150,000 people every year in the country. 

The problem at the moment is that insurers have to rethink the structure of their products. Jain says, “We can't say whether prices will fall or increase, as TP liability depends on claims compensation awarded by motor accident tribunals.”
The authorities calculate the compensation on income levels of victims and future realisable incomes in cases of accidental death. In motor-TP insurance, prices are regulated entirely by Irdai. 

The body revises prices every year; this April 1, it issued lower rates for both vehicle categories as compared to last year. “Income and cost keeps increasing. Structurally, for any long-term policy, there will be need to forecast the possible future compensation and arrive at premiums accordingly,” said Jain. 
Irdai panel

On Friday, the regulator constituted a committee to look into motor-TP pricing, headed by member (non-life) P J Joseph. The 16-member panel will have to examine insurers’ data and compute prices, based on historical rates of compensation granted to victims or for property damage. 

Sahni said the regulator would sooner or later come up with guidelines (two-year for cars and five-year for two-wheelers) for comprehensive motor insurance products, not mandatory at present.

The Irdai committee has representatives from the ministries of finance and road, transport & highways. And, from the All India Motor Transport Congress, Bus Operators Confederation of India, and insurance executives. They will have to make recommendations for motor-TP pricing for 2019-20.

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