Rise in 3rd party motor premium to partially offset losses for insurers

The recent increase in the premium rates on third-party motor insurance is unlikely to fully offset the motor insurance segment's underwriting losses, Crisil Ratings said in a report.

The premium rates for third-party motor insurance have been increased from June 1.

Premiums for two-wheeler insurance have risen the most -- by 12-21 per cent -- across engine capacities. For private cars, the maximum increase is 6 per cent.

"The Ministry of Road Transport and Highways' move to increase the premium on third-party motor insurance after two years is a step in the right direction, but unlikely to fully offset the segment's underwriting losses," the rating agency said in the report.

Third-party insurance cover is for other than own damage and is mandatory (as per the Motor Vehicles Act, 1988) to purchase along with own damage cover.

Underwriting losses occur when claims are higher than the premium income of an insurance company.

The last time premiums were hiked was in June 2019 and thereafter policyholders were given some respite because of the COVID-19 pandemic, the agency said.

Its Senior Director and Deputy Chief Ratings Officer Krishnan Sitaraman said underwriting losses remain high in motor insurance because the premiums earned on policies are inadequate to pay the claims made by the policyholders.

"Therefore, any increase in premium helps in reducing losses. So, while this latest increase in premiums will offer a breather, it won't be enough to stanch the bleeding," Sitaraman said.

The agency said the latest increase, combined with the recovery in automobile sales, will likely result in a 12-13 per cent growth in third-party motor cover premiums, which account for a fifth of the general insurance industry's gross written premium.

On the other hand, claims incurred by most insurers have risen since the second quarter of last fiscal, following the relaxation of lockdown restrictions and reopening of offices.

The claims ratio is estimated at around 85 per cent for the last quarter of fiscal 2022, up from around 78 per cent in fiscal 2021 and is estimated to stay at similar levels in this fiscal, the report said.

The claims ratio is the percentage of claims incurred in relation to premiums earned.