Motor Insurance: The Loss making portfolio in a regulated set up

Generally the countries with a tariff regime and with a controlled market tend to have higher premium than those of the free market. In India, however the situation is different. The motor premium rates were among the lowest in the world. The average motor premium ranges from 2 to 3 per cent of the value of the vehicle as compared to 8 per cent in western countries. The reason is due to the absence of data in the Indian market to support a justifiable pricing mechanism.

The older insurers, who had a market share of more than 80 per cent were unable to generate adequate database to enable scientific calculations for risk assessment and rating of different groups of vehicles. Therefore, underwriting in the transport sector was perceived to be a losing proposition, with claims well over 120 per cent of the gross premium income.

The net result was that the administered pricing became flawed in the absence of data. For the same reason, the commercial vehicle operators, users, lobbyists, Government or the Courts could not be convinced to approve increase in rates even in the wake of deterioration of claims experience of the insurers.

Evolution of De-tariffing Concept

As discussed earlier, in a competitive market, the products need to be priced equitably based on their individual risk experience which was not practiced due to tariff restrictions. It was alleged that tariffs were rigid based on out-dated statistical data, and that premium rates were not revised in response to the market dynamics. It resulted in heavy cross subsidy of premium for those lines of business which had persistent high claims ratio, for e.g. Motor Third Party.