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THE DEFERRAL OF the hike in motor insurance tariff the IRDA is a welcome step. By making car and two-wheeler owners pay substantially more — even up to 100 per cent — the insurance companies were hoping to make up for the losses they incurred in third-party claim settlement for the commercial vehicle segment. Such a hike is best shelved for it would have been unfair to the former segment that is mandatorily required to buy insurance — at least third party cover — but does not have the lobbying power to oppose tariff hikes. On the contrary, the strong lobby of the latter group — the commercial vehicle owners — ensures that premiums are not raised; the truck industry's clout was manifest in 1999 when it forced the Government to roll back a tariff hike, from the proposed three slabs to one, by going on a strike.

Left with no choice, and thanks to the recommendations of the Committee for Revision of Motor Tariffs — the Ansari Committee — the insurance industry turned on the other segments of the motor vehicles market, risking public interest litigations if not organised lobbying. The insurance companies' plight is understandable when the claims ratio touches an incredible 120 per cent — that is, for every Rs 100 collected as premium, they settle claims of Rs 120. This is double the claims ratio for any other risk category, marine, fire or engineering. This is so because there is no limit to third-party motor vehicle claims, unlike as in the case of rail or air accidents. So it is really up to the skills of the lawyer — ambulance-chasers, as insurance companies call them derisively — to get courts to order payment of any amounts in these pro bono cases. Result: High underwriting losses and retention rates in the negative. That this is doing the industry immense damage is obvious from the reluctance of the new private players to insure commercial vehicles but to stick to cars and two-wheelers.

Yet, this may be easier said than done, for motor insurance forms about a third of the business underwritten by insurance companies. To take on the commercial vehicles segment, the insurance companies need to change tack — have a base rate and predicate the renewal premium on the track record of the insurance buyer. That is, the premium would go up with every accident or claim settled on behalf of the insured. A standard practice in developed countries, this has had the happy consequence of bringing discipline among vehicle owners/drivers. Accidents are down, and consequently claims. Insurance companies also need to invest in educating drivers, ensuring stringent licensing norms, and even contribute to the task of building better and safer roads and maintaining them — all aimed at ensuring fewer accident claims. They need to take control of their business environment rather than let it overwhelm them.

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