Insurance losses develop over years. Estimates of outstanding losses at end of each financial year are provided by each insurance company. The Outstanding loss provisions include IBNR (Incurred but not reported) and IBNER (Incurred but not enough reported),Providing for outstanding losses conservatively is trademark of a good insurance company. Normally, actuaries are expected to ensure the same. However, being over-conservative is frowned by Tax authorities since more outstanding provisions means less net profit and hence lower Tax and hence Tax Authorities view the same as a means of reducing Tax outgo.
IRDAI expects insurers to publicly disclose the development of losses over a ten year period.The loss development table shows the estimate of ultimate losses, including loss adjustment expense, at the end of each year, against each accident year’s provision of losses and loss adjustment expense in subsequent 10 years. It indicates a company ability to estimate future liabilities.
All data used below is taken from ICICI LOMBARD Annual Report for FY 2022-23
Above table indicates that the motor third party pool had a huge deficiency in reserving. Despite the deficiency, loss ratios were above 100%. Due to this reason, Motor TP premium was increased every year.
Let’s now look at the Loss development table for Motor Third Party portfolio of ICICI LOMBARD. This is a long tail business. We can see from the table that ICICI LOMBARD is able to conservatively estimate their long-term liabilities even for long tail business. When long term liabilities can be accurately estimated, they can be priced. Hence, Insurance companies should be allowed to price for TP liability.
The loss ratio for Motor TP liability portfolio of ICICI LOMBARD for FY 2021-22 was 74% and for FY 2022-23 was 72%. Motor TP is statutorily required to be compulsorily bought for every vehicle plying on public road. Hence, there is no reason to give high commissions for this business. Hence, margins available for insurers are very decent.
Thanks to these margins, the Motor Own Damage premium is being subsidized. For majority of the vehicles, Motor OD premium is a fraction of the Motor TP premium. This is resulting in an inability for the insurers to reward better drivers following all safety norms. Pay as you use, which rewards drivers who use their vehicle sparingly, has also not properly taken off. Large number of applications are available which can track driver behaviour and safety record on a real time basis. This could have been used to ensure that the premium is lower for better drivers and higher for drivers who ignore safety. Unfortunately, since premium is very low for own damage cover, ability for insurers to differentiate based on safety is almost non-existent. Hence, Telematics in insurance has not taken off, despite availability of best of technology in India. Use of Telematics could have brought down motor accidents and been a very great benefit for the society.
It is high time, administered pricing is withdrawn for Motor Third Party coverage. One question may arise -why have I not considered industry data? Why am I basing myself on data of one single company-ICICI LOMBARD? The reason is ICICI LOMBARD annual report has a wealth of information, which is publicly available. It is one of the largest insurers in India. We cannot allow inefficiency of few insurers to be the reason for charging high premiums from customers.
