IRDA hike in vehicle provisioning norms irks insurers

India's general insurers are upset by the move by the Insurance Regulatory and Development Authority (IRDA) to almost double the provisioning norms for motor vehicle insurance. The regulator has asked insurers to keep aside 210 per cent provisioning for the high-risk category of third party motor insurance, up from the current 110 per cent.

The higher provisioning will not raise premium rates for people buying motor insurance, but it will raise costs for insurance companies.

General insurance companies are in a bind since they cannot charge a commensurately higher premium to make up for the cost but will instead have to provide for it from their profits, according to an Indian Express report.

An IRDA notification issued on 18 November said a special committee formed by the regulator has recommended the higher ratio for what is known as the Declined Risk Pool. Claims against commercial vehicles, which do not have full insurance cover, are paid from this pool.

Under the Indian Motor Vehicles Act, all vehicles must at least have a third party insurance – which means damage to the vehicle itself is not covered, but damages claimed by the other parties in an accident is covered. Currently, the size of the Declined Risk Pool is around Rs400 crore.

Insurers have taken up the issue with the IRDA. "Else we should be allowed to charge higher rate for third party motor business where pricing is regulated by the IRDA," the newspaper quoted the chief executive of an unnamed insurance firm as saying.

The average loss ratio for third party motor business is in the range of 140-150 per cent. Effectively, a general insurer pays a claim of Rs150 on a Rs100 premium.

"Till now the general insurers were providing for the standard third party portfolio on the basis of their own actuarial valuation. The IRDA norm of 210 per cent on the provisioning for the Declined Risk Pool is a clear indication that the regulator wants higher provisioning for the other segments of motor business too,'' said the chairman and managing director of a public sector general insurance company who didn't want to be named.

The regulator scrapped the old third party pool and introduced the Declined and Non-declined segments in 2012.