IRDA introduces the declined risk pool for the Indian Motor Insurance industry.

The last fiscal was not at all encouraging to the Indian Motor Insurance Industry. The loss ratio currently stands at 145%. Simply put for every Rs 100 premium paid, the loss incurred is Rs 45. Under the Indian Government Laws, third party cover is a mandatory purchase along with the purchase of your vehicle. However due to high losses, private insurers refrained from providing third party covers. Therefore Insurance Regulatory and Development Authority (IRDA) came up with this motor third party pool in 2007, where premiums pertaining to third-party risks collected by all general insurance companies are added to this pool. All claims paid are debited to this motor pool. Based on the market share of the insurance companies, the losses from the third party pool were shared by the insurance companies. The third party premium for all vehicles is regulated and insurers have no role in deciding the premium. As a result efficiencies have found its way and even those insurance companies which were not aggressive with car insurance had to bear the brunt of these loses because of their market share.

However this third party pool would undergo a change from April 1st, 2012. IRDA has already come up with their guidelines addressing the concerns raised by the loss making car insurance market. They have recently formed another pool called the “declined risk pool for third party motor policies”. This new pool would apply to commercial vehicles for standalone third party insurance liability. Comprehensive motor insurance cannot be settled from this pool. Third-party insurance cover protects the vehicle owner from any financial liability in case of damage to life or property in an accident to the third person. Comprehensive motor insurance adds the personal vehicle damage cover also to it. Comprehensive motor insurances are hence more expensive. The removal of the comprehensive policy would shrink the size of the newly proposed motor pool to a quarter of its original size. The present size is about Rs 6000 crore. According to IRDA, the insurance companies would retain 20% of the gross premium in their own account, 10% would go to General Insurance Corporation of India and the rest 70% would go to the motor pool.

This new declined pool would hopefully reduce the loss ratio of the motor insurance market and make things more transparent and fair for the insurance companies. However in view of these new regulations and other inflationary measures, motor insurance premium might go up by 10- 15%.

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