Page 21 - Insurance Times November 2021

the presumption that the percentage of insured vehicles in
both the years is same). Therefore the premiums of two different periods can not
be compared without considering the effects of inflation.
Having reasonably satisfied with the correctness of the Fortunately few indices on inflation are available to facilitate
extent of increase in the premium rates by different the conversion of nominal figures into real figures with
methods, now we can confidently proceed to examine the reference to a base year. There are several indices in use,
core issue manifested in the above paras - Which other each one designed to serve some specific purpose. There is
factors (as the impact of incidence is already separated no separate inflation index meant to be used for the matter
above) have contributed to 28 times increase in the under consideration. The index being considered here is Cost
premium rates during 2002-03 to 2019-20? Following paras Inflation Index (CII) used for ascertaining the capital gains
attempt to identify and quantify the impact of the such by the income tax department. The Cost Inflation index for
other factors which might have contributed for the increase. the year 2019-20 is 289 against the index of 105 for the year
2002-03. This Index of 289 in 2019-20 over 105 of 2002-03
The quantification of the impact of incidence was represents an average inflation rate of 6.5% per annum. To
comparatively simple as, ready and reliable, information confirm the appropriateness of it's use a comparison is made
(independent of premium mechanism) relating to incidence with an alternative index (The CPI for India published by IMF
was available in the data published by Ministry of Road with a base year of 2010, shows a change of 1.7 times during
Transport and Highways. Though it may not be so easy with 2010 to 2019, as against 1.9 times change for the same
respect to other factors yet we can attempt to understand period in cost inflation index (CII)). This consistency in CII and
the impact by using available best tools and by deductive IMF CPI, clearly validates the use of cost inflation index for
reasoning. Now let us attempt to understand the impact this analysis. Yet there could also be a suggestion to use
of inflation on the increase in the premium rates. medical inflation index which is likely to reflect higher
increase than the general index of inflation. Some recent
2. Inflation figures of health/medical inflation are as follows (Published
Inflation, has been a defining economic feature of all modern in Business Line dated 23rd June 21)
societies. No citizen can claim its ignorance and nor any
particular sector can be immune to it's effects.. This Jun 21 7.7%
monetary phenomenon constantly erodes the value of May 21 8.4% (Headline inflation rate 6.3%)
money. What can be bought by one rupee today needs two Jan 21 6.0%
rupees a year after. Hence tomorrow's two rupee is equal Dec 20 3.8%
to today's one rupee. The accident relief provided is intended
not only to reimburse the expenses caused by the accident It may be noted that medical inflation index is relevant only
but also to compensate the economic, personal and social for hospitalisation expenses arising from accidental injuries
deprivation caused to the victims of such accident. While
and not for other components of compensation. Even if we
reimbursements and income based dependency calculations
decide to take a higher rate of inflation the impact of such
automatically compensate for increased costs, the other higher rate as worked out in "Annexure E" will be as
components of nominal compensation have to be increased mentioned below.
to ensure that the value of real compensation is not eroded.
Thus inflation contributes to the increase in the amount of "Every 0.5% higher inflation rate will result into an increase
claims and thereby to the increase in premium.
in premium by 0.70 times".

Thus use of a slightly higher inflation rate will not alter the
inference of this write up derived, based on cost inflation
index, but only lays a little greater emphasis on dominance
(by 0.7 to 1.4 times) of contribution of inflation to the
increase in premium.

The table below presents the inflation index adjusted
premium figures of 2019-20 along with premium figures of
2002-03.

The Insurance Times, November 2021 21