Higher provisioning to increase insurers’ losses by Rs6,500 crore: Crisil

The latest regulatory developments in the motor third-party (TP) segment are likely to pose challenges for the general insurance industry in the near to medium term, said ratings agency Crisil in a statement today

However, it added the regulatory changes introduced by in March 2012 when IRDA raised provisioning rates for the motor TP pool segment, were structurally positive for the sector over the long term.

Consequently, the underwriting losses in the motor TP segment, which has the most adverse claims performance, are likely to reduce over time.

In the interim period, however, the additional provisioning of Rs6,500 crore (Rs65 billion) that the higher provisioning will necessitate will weaken the insurance industry's underwriting performance. This is more than twice the provisioning increase that followed IRDA's rate hike of March 2011.

Motor TP, the only segment that has regulated tariffs, accounts for nearly a third of the insurance industry's overall claims. To address the issue of adverse claims performance, IRDA announced annual rate hikes in motor TP in April 2011 and again, in March 2012. The latest revision hikes premium rates for private vehicles by 5 to 8 per cent (10 per cent in April 2011) and those for commercial vehicles by 10 to 30 per cent (68 per cent in 2011), with effect from 1 April 2012.

The second round of provisioning increase announced by IRDA in March 2012 takes into account the motor TP segment's consistently adverse performance on claims, and is for each of the five years between 2007-08 and 2011-12.