Page 208 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 11: Motor Insurance

Notes

Case Study Is Motor Insurance Hike Justified?

ny change in the pricing of motor insurance, which accounts for 41 per cent of the
premium and a substantial component of the claims of the entire general insurance
Aindustry, is bound to generate interest.
Historically, motor insurance business has been loss making, running at loss ratios of
approximately 120 per cent, that too without accounting for management expenses.
While the losses on account of vehicle damages are high – around 70 per cent–75 per cent
of the premium — those relating to third party are consistently above 200 per cent.
Although insurers are saddled with unlimited bodily injury liability, the premium charged
for the risk is very low — approximately 5 per cent of the own damage premium and less
than quarter per cent of the vehicle value. This accounts for more than 50 per cent of the
losses.
To provide adequate financial security to dependents of victims of road accident is the
rationale for the provision of compulsory unlimited liability for bodily injury in the
Motor Vehicles Act.

However, it is unfair for the insurers to be asked to bear this liability at non-commensurate
rates. This would be a sure formula for losses for any general insurer in the country.

In India, the prices have been ‘administered’ by tariff as opposed to a price that would
recover the costs i.e. the ‘Pure Premium’. Ideally, as is in most developed markets, the
market forces should be allowed to operate to determine pure premium-based price of
products.
The insurers should be free to fix a ceiling on the maximum third party bodily injury
liability, which they would be able to support under the current/proposed pricing.

Since the third party bodily injury cover is a governmental measure, the government
should meet the liabilities in excess of these limits from a fund like the ‘Solatium Fund’.

Such arrangements between the government and the insurers have been successful in
Japan.

The proposed hike in premium is the first step in the direction of realistic pricing of the
motor insurance policies. We certainly look forward to an active participation of the
government, general insurers and the insuring public in moving towards a sustainable
pricing regime. (The author is MD, Tata-AIG General Insurance).
Questions

1. Discuss the rationale for the provision of compulsory unlimited liability for bodily
injury in the Motor Vehicles Act in a group of five students.

2. What is your opinion about the realistic pricing of the motor insurance policies?
Discuss.

Source: http://articles.economictimes.indiatimes.com/2002-06-07/news/27340174_1_motor-insurance-
damage-premium-tata-aig-general-insurance

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