Insurance is a contract whereby one party, the insurer, undertakes in return for a consideration, the premium , to pay the other, the insured or assured, a sum of money in the event of the happening of a , or one of various ,specified uncertain events.
Motor third-party insurance or third-party liability cover, which is sometimes also referred to as the 'act only' cover, is a statutory requirement under the Motor Vehicles Act. It is referred to as a 'third-party' cover since the beneficiary of the policy is someone other than the two parties involved in the contract i.e. the insured and the insurance company. The policy does not provide any benefit to the insured; however it covers the insured's legal liability for death/disability of third party loss or damage to third party property.
The Indian motor vehicle third party insurance pool (“the pool”) as it exists now covers only ‘commercial vehicles’. Commercial vehicles are an omnibus class that includes all vehicles other than ‘private cars’ and ‘two wheelers’ as specified in the erstwhile India Motor Tariff of the Tariff Advisory Committee (TAC). The TAC definition of ‘two wheelers’ also includes two wheelers with side cars.
The pool encompasses standalone third party insurance as well as third party insurance forming part of comprehensive motor vehicle insurance. Comprehensive insurance covers ‘Own Damage’, that is, damage to the insured vehicle, apart from third party liability. The premium for third party (TP) insurance is notified by the Insurance Regulatory and Development Authority, India (IRDA). Insurance companies are required to charge the premium strictly as notified by IRDA. The rates currently notified with effect from April, 25, 2011 are 68% higher than what it was in 2007. The losses however continue to be higher.
The pool is a multilateral reinsurance arrangement. The General Insurance Corporation of India (GIC Re) is the pool manager. All general insurance companies in India that are licensed to transact motor vehicle insurance are required to be members of the pool. It is important to bear in mind that the motor pool is not a voluntarily pool evolved by consent among the participating insurers but one that is notified and mandated by IRDA.
History and present status
Third party insurance is compulsory for all vehicles under the Indian Motor Vehicles Act. Prior to opening up of the insurance market in 2000-2001, all four public sector companies (PSUs) transacted motor vehicles insurance. Though TP insurance was generally felt to be unprofitable and thus unattractive, no significant reluctance on the part of the PSUs to write TP business was perceived. The position changed with the opening of the insurance market in 2000-2001 when several private sector companies were licensed to transact insurance business in India. Consumers complained of reluctance and avoidance on the part of some companies to write TP business. Since IRDA had mandated that no insurer shall refuse the compulsory TP insurance, the complaint was that reluctance and avoidance were practiced by using clever subterfuges. There was also a demand from the PSUs for creating an equitable sharing mechanism for sharing the unattractive business among all insurers, public and private.
The initial design of the pool was a ‘declined pool’ to cover only those vehicles for which there were no takers. But, the pool that was finally notified by the IRDA with effect from April 1, 2007 covered only commercial vehicles. This position continues as of now.
Serving purpose and learning lessons
As mentioned in the introduction, the basic purpose of mandating the pool was to address the supply side constraint. The supply side constraint has been tackled satisfactorily by the pool. Complaints of refusal, reluctance and avoidance are now far and few. But there are questions of sustainability of the pool at the current administered premium rates. Recently, insurers have been required to provide for sizable premium deficiencies which may possibly go further up in the coming years as the losses develop and average size of compensation for victims of road accidents escalate.
One view is that continuance of the unattractive pool is the price the insurers will have to pay for doing business in India. Another view is that the pool should be withdrawn, if not immediately, at least gradually: the reluctance and avoidance will disappear once the insurers are given freedom to charge premium rates commensurate with the risk .While some fear that the premium rates will go up exorbitantly if pricing freedom is given, others feel that competition will eventually bring the rates down.
Another possible downside of a mandated pool is that it may not encourage cost cutting and efficiency. The pool is everybody’s baby and hence nobody’s baby. Ultimately, the danger of a ‘convoy syndrome’ where the speed and inefficiency of the least efficient participant becomes the speed and efficiency of the industry is possible and real. This is what seems to have happened in the earlier oligopolistic era when the four PSUs set up Motor Third Party Claims Offices (MTPCOs) at regional centers to transfer and settle motor TP claims across the companies. Ultimately, the MTPCOs were wound up. Drawing a comparison between the MTPCOs and the present mandated pool can throw up useful lessons.
World over, a pool mandated by the market regulator is not a preferred practice; on the contrary, market regulators encourage participants forming pools voluntarily to share risks. An example in India is the ‘terrorism pool ‘where, in the aftermath of the US 9/11 incident, the insurers were encouraged by the IRDA to form a voluntary pool to create collective capacity within India for terrorism risks.
It is reasonable to presume that the motor pool is not intended to be a perpetual arrangement. Hence it is quite possible that the IRDA may like to move away from the mandated motor pool eventually. What form this will take is not easy to predict.
One method could be to replace the present pool by a ‘declined risks pool’ wherein an insurer is given the freedom to write a TP risk for his own account if he chooses to do so, or write for the pool account if he does not want it for his own account. In this process, the pool size itself will get reduced and can be a forerunner for its eventual dissolution when its size becomes insignificant - thus indicating that the market has matured. Here the expression ‘declinature’ is not used in a strict sense but only as an internal formality in the insurers’ records.
Within this methodology, variants are possible. One variant could be keeping out of the pool, TP business forming part of comprehensive policies, and keeping in only pure TP policies. The possible advantage in this variant is that while it helps to reduce the size of the pool considerably, it may also help to put an end to the current unhealthy practice of indiscriminate under cutting of Own Damage (OD) premiums by insurers. Whatever may be the method adopted, safe guards will have to put in to ensure that there is no misuse by the insurers or harassment of the policy holder.
A system of gradual phasing out has been followed successfully in a few other markets which had similar pools. What method our market will follow remains to be seen.
I thank Sri K K Srinivasan, ex-member IRDA for all useful inputs