As many talks are taking rounds in the industry over the issue of Third party pool; be it rise in Third party pool provisioning or dismantling it. We will take you through a complete story of Third party pool from it's formation, the problems it had faced in last couple of years.
Third party motor insurance is the only insurance product in India mandated by law. This means that one has to drive the vehicle on public road is bound under the Motor Vehicles Act, 1988 to have a third-party motor insurance policy.
Many of us still do not know what Third Party Liability insurance is & how the concept of third party pool works. Let's understand this better.
Function of Third party Liability Insurance
The primary function of third party liability insurance is to protect the Insured/Policy Holder in the event of an accident causing bodily injury and/ or death and property damage to third parties.
Reasons behind formation of Third Party Pool
The third party pool was created because of supply side constraints. Distribution of the cover was limited because more efforts were put by industry participants on other products. On 1st April, 2007 Indian Motor Third Party Insurance Pool (IMTPIP) was setup by all General Insurers in India. The main objective behind this was to make available Third Party Insurance to all commercial vehicle owners at reasonable rates and terms and to distribute the losses on this account to all market participants.
General Insurance Corporation of India (GIC) acts as the administrator of the pool. It will act under the guidance of the General Insurance Council. For this purpose, the Council has established various committees of insurers. These committees advices GIC on all issues relating to the Pool.
Origin of the problem
The motor insurance was de-tariffed in 2007, however Third Party Liability cover was still regulated to ensure that the mandatory third-party cover didn’t become out of reach for vehicle owners, this has posed a problem for the insurers.
The premium for the third party liability cover is limited however the claims are unlimited. The lack of balance between the premiums paid and liability incurred has led to an adverse claims ratio, especially with regard to commercial vehicles. Currently non-life industry is experiencing huge losses on account of this portfolio.
Reasons why the pool is not working
The pool arrangement works on concept of sharing of the losses by all insurers. In this arrangement the TP premium collected by by all the non-life insurers for commercial transport & the claims incurred are retro-ceded to the insurers as a function of their overall general insurance market share.
For example, suppose the premium collected by the pool is Rs. 10 lakh, whereas the claims incurred is Rs. 15 lakh in a given year. Now company X which has an overall market share of, say, 20% will get Rs. 2,00,000 from the pool as premium income but will have to shell out Rs. 3,00,000 as claim amount?20% of the total premium income and total claims amount, respectively. In other words, regardless of how many policies company X would have underwritten, it will have to incur a loss of Rs.1,00,000
Since the quantum of losses from the pool is huge, the insurers are under heavy strain.
As mentioned earlier, Third party motor insurance is mandated by law in India. Hence every vehicle need to have a third-party motor insurance policy. The third party liability premiums are still regulated and the overall premiums are lower than the losses reported under the cover. Due to this fact, the Third Party liability cover continues to suffer with huge losses.
Reasons for premium increase
Insurance companies have been providing for third party claims in line with the financials provided by the third party pool administrator. In case actuarial estimates indicate that the provisioning needs to be increased further, industry losses would naturally go up, and additional capital requirements will arise. In such a scenario, unless third party premiums are revised to more closely reflect the actual claims incurred, the already existing imbalance between premiums and losses would be further accentuated - putting insurers under heavy strain from a profitability, capital requirement perspective & may also have to modify their business growth plans.