Page 16 - Insurance Times November 2021

the composition of 2017 is considered while calculating 2. Rate of inflation
weighted premium for 2019-20. I believe that this will not 3. Quantum of relief (Security content) which depends on
make material or significant difference, either for analysis a. Legal provisions
or for the results and conclusions flowing therefrom. The
analyses also omits rates of certain categories of vehicles, b. Profile of the victims, like age, income / occupation,
dependents etc
because these categories are not amenable to provide
(because of the method of rating) precise premium figures. c. The trend reflected in Judicial pronouncements
I again believe that this omission is also not likely to
materially affect the analysis or its conclusions. The increase The role of each one of the above components, in the
in premium per vehicle is the basis for analysis. Hence the increase in the premium rates is the subject of this write
number of vehicles is immaterial in the analysis, except only up. Rating is also affected by other factors like the extent
in the paras relating to "validation of increase by alternate of acquisition costs (commission) and insurer's operating
methods"- Author) expenses. During the period of the analysis (which covers
2002-03 to 2019-20) covered by this article, no significant
Introduction changes are observed in these factors. More over relevant
published figures point towards some minor reductions in
April is the beginning of financial year of the government as these costs. Therefore these factors are kept out of this
well as of many corporate and non corporate, commercial and analysis.
non commercial organisations. A period full of hopes and plans
for the ensuing 12 months. April is also eagerly awaited by
Incessant, year-after year, steep hike observed in motor
another segment of our society for reasons other than being a third party claim amounts, has been the defining story of
beginning of financial year. It represents a season for onset of
Indian insurance industry in the last three decades. In view
changes in motor third party premium rates. During this period of the size of the Motor Third Party Liability portfolio, it's
the Insurance Regulatory and Development Authority of India,
performance has been the prime accused for the huge
after following due process, notifies the rates of premium for underwriting losses of insurers and also for the deteriorating
insurance of motor third party risks. While the vehicle owners solvency. "How long can this continue?" seemed to be an
(Insurance customers) will be praying for status quo, so that unending riddle. No segment of general insurance business
their budget is not upset and the insurers will be looking for has seen the type of extensive and close scrutiny that the
substantial relief, by way of hike in the rates, so that their motor third-party segment has been subjected to. Yet every
struggle to balance their budget (revenue and the claims)
one has been gasping for satisfactory solutions. The high
remains smooth. The regulator will be struggling to strike an claims ratio in excess of 100% (at times going up to 200 to
acceptable balance amongst the clashing expectations. Thus, 250%) year after year, without any respite for several years,
rating of Motor Third Party Insurance is an interesting dynamics was a challenge which could not be surmounted by any of
of facts, pulls and pressures.
the insurers. It seems, of late it has moderated a little,
which might have been the outcome of rate revision, rather
The primary principle of rating process is economic, and is than the result of improvements in any ground realities.
supposed to be based on the concept "rates should reflect Hence the unending search for solutions continues.
the long term claims experience". Though at times, in
pursuit of set objectives, this principle may be tweaked a
This write-up analyses the factors listed above in one of the
bit by the regulator, yet the principle remains the core of preceding paras, which are supposed to have contributed to
the rating process. Claims ratio, more particularly the
the increasing claims ratio and thereby to increasing
combined ratio of the industry represents this economic premiums, with a view to facilitate genuine and objective
base. It reflects the actual cost of insurance. The claims understanding of role of each one of these factors and also
ratio, is in fact made up of multiple components. With
to look for some useful lessons which can guide the future of
respect to Motor Third Party Liability segment, components
this segment. It also attempts to quantify, step by step, the
which shape the size and magnitude of the element which impact of each of these factors in the claims ratio / rating.
goes by the description of claims experience / ratio (also Attempt is made initially to separate and quantify the impact
called Pure Risk Cost) can be broadly listed as follows.
of three factors - incidence, inflation and quantum of relief,
followed by further attempt to quantify the impact of different
1. Incidence of accidents (outcome of vehicles, roads,
factors under the category of "quantum of relief". Since all
enforcement of rules and regulations etc)
these factors jointly and simultaneously operate on the claims
16 The Insurance Times, November 2021