Attention is invited to Authority’s order no. IRDA/NL/NTFN/MOTP/066/04/2011 dated 15th April 2011, to review and lay down the premium rates for Motor Third Party insurance covers. Accordingly, the Authority has issued an exposure draft on Revision of Premium Rates for Motor Third Party Insurance Covers for the Financial Year 2017-18, which is placed at IRDAI website: www.irda.gov.in
The Authority hereby invites all stakeholders to provide their comments on this draft proposal so as to reach the Authority, physically or by e-mail addressed to Smt. KGPL Ramadevi, Deputy General Manager at kgplramadevi [at] irda [dot] gov [dot] in, on or before 18th March 2017.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
EXPOSURE DRAFT
Ref: IRDA/NL/MTP/2017-18/EXDRF
03rd March 2017
Exposure Draft on Revision in Premium Rates for Motor Third Party Insurance Covers for the Financial Year 2017-1 8
By virtue of powers vested in the Authority under Section 14 (2) (i) of the IRDA Act, 1999, the Authority has been notifying the premium rates applicable to Motor Third Party Liability Insurance covers every year starting from 15.04.2011.
For the financial year 2017-18, the Third Party insurance premiums rates for various categories of vehicles have been arrived at as follows:
I. Data Source:
The data supplied by the Insurance Information Bureau of India (IIBI) for the experience period consisting of Accident years from 2011-12 to 2015-16 in respect of Gross Written Premiums and amount of claims paid up to 31st March 2016 has been made use of for analysis and arriving at the rates.
II. The working of the Rate Revision:
Data Used
1. The paid claims data in respect of each of accident years starting from the year 2011- 12 to 2015-16 has been considered.
2. The paid claims data is a cumulative accident year wise data with one line for every combination of ‘Class Code’ and ‘Vehicle CC/PCC/GVW’ Code.
3. The paid claim amounts consist of base claim amount, accumulated interest amount and claims management expenses; and
4. Gross Written Premiums data for the FYs 2011-12, 2012-13, 2013-14, 2014-15 and 2015-16 has been considered.
Methodology
1. The ultimate claim costs for each accident year are estimated using actuarial technique of Basic Chain Ladder Method applied to cumulative paid claims data.
2. The main characteristics of the technique is that ultimate claims for each accident year are estimated from the recorded paid values to date, thereby assuming that the future development of payment of the claims would be similar to the pattern of payment of the claims during prior years.
3. The selection of age-to-age-factors (ATAFs) is done after considering various averages of ATAFs like simple average, weighted average, average of last 3 years etc. Sometimes the ATAFs don’t show a consistent movement. If this is the case, some manual adjustments are made to make the flow pattern of ATAFs consistent.
4. It is observed that the ATAFs for the most developed periods available are significantly higher than 1.00. This is not surprising considering the fact that the motor third party insurance is long-tail line of business and complete run-off occurs after a significant period of time.
5. The oldest accident year has only 5 years of the development, which is not sufficient to fully run-off the paid claims for that accident year. ATAFs of further 7 years of development are projected by considering the similar movement of expected future ATAFs as that of last available year of the development. So assume, ATAF of last available year is 1.3 while that of second last year is 1.6, a ratio ((1.3-1)/(1.6-1)) = 0.5 is determined. By applying this factor, future ATAFs of 7 years is estimated. A multiplication of these 7 ATAFs is considered as ‘tail factor’. A tail factor would project the paid claim from the latest development period to the ultimate.
6. The ultimate expected claims for various accident years are estimated by considering cumulative development factors (age-to-ultimate) and the latest cumulative paid amount for a particular accident year. The ultimate claim amount is estimated for each accident year.
7. Based on the class codes and CC/PCC/GVW codes, financial year wise gross written premiums from the premium data are populated. The financial year wise gross written premiums are converted to financial year wise gross earned premiums by applying the formula:
GPE for FY 20(t) – 20(t+1) = (GPW for FY 20(t-1) – 20(t) + GPW for FY 20(t) – 20(t+1)) / 2
GPE: Gross Premium Earned
GPW: Gross Premium Written
8. By considering movement of the actual unit premiums during the FYs 2011-12, 2012- 13,2013-14, 2014-15 and 2015-16, de-trended earned premiums for the FYs 2012-13, 2013-14, 2014-15 and 2015-16 are estimated with base of FY 2011-12 earned unit The use of de-trended premium rates takes out the impact of changes in premium rates over the period on the Ultimate loss ratios (ULRs) as determined in next step. This helped in estimating ULRs for AY 2016-17 business and AY 2017-18 business based on FY 2016-17 earned premium rates. The earned unit premium for a financial year is estimated by considering average of the unit premiums of preceding and current financial years.
9. The Ultimate Loss Ratios (ULRs) for various AYs 2012-13 to 2015-16 are estimated by dividing estimated ultimate claims by de-trended earned premiums. Since de-trended earned premiums are used, projected ULRs of different accident years consider only the impact of movement in frequency and severity over the period AY 2011-12 to 2015- 16 while taking out impact of increase in the premiums over these years
10. A compounded annual growth rate (CAGR) in ULRs is calculated from AYs wise ULRs determined in step 10. The determined CAGR is only due to the changes in frequency of claims and severity of claims over the years. Since the estimated CAGRs contain the effect of landmark judicial pronouncements of the past, the estimated CAGRs are moderated to take out the effect of those pronouncements. For some categories, the movement of ULRs is very erratic and CAGR is either negative or very small. For these cases, an CAGR of 10% is assumed which is used to estimate ULRs for AYs 2016-17 and 2017-18.
11. The determined CAGR is applied to de-trended estimated ULR of AY 2015-16 to estimate de-trended ULR of AY 2016-17 business.
12. By applying ratio of FY 2016-17 and FY 2011-12 earned unit premiums to the de-trended ULR of AY 2016-17, ULR of AY 2016-17 based on FY 2016-17 earned premium is estimated.
13. The estimated CAGR is applied to estimate ULR of AY 2017-18 business in case FY 2017- 18 earned premiums remain same as of FY 2016-17 earned premiums.
14. The premium for FY 2017-18 should consider following cash-flows:
- Cash-outflows due to claims cost
- Cash-outflows on management expenses (variable expenses)
- Cash-outflow as Fixed expense per policy
- Cash-inflow as t h e potential to earn investment income since there is a significant time lag between the payment of claim and the date of accident
- Cash-outflow as cost of capital. Capital is set aside in order to maintain the required solvency level
15. By considering the estimated ULR of AY 2017-18, FY 2016-17; premium and target ULR based on various cash-flows as mentioned in the premium applicable for FY 2017-18 is estimated. The AY 2017-18 will be having claims for the business written during FYs 2016-17 and 2017-18. Therefore, the estimated premium for FY 2017-18 will be good for the first half of the FY 2017-18.
16. The target ULR and the CAGR determined above are used to estimate AY 2018-19 ULR based on FY 2017-18 premiums (first half of FY 2017-18).
17. By considering the estimated ULR of AY 2018-19, FY 2017-18 premium (first half) and target ULR based on various cash-flows as mentioned above, the premium applicable for second half of the FY 2017-18 is estimated. The AY 2018-19 will be having claims for the business written during FYs 2017-18 and 2018-19. Therefore, the estimated premium in this step will be applicable for second half of FY 2017-18.
18. An average of premiums determined in above steps is to determine estimate premium for FY 2017-18 and used to estimate premiums for all the categories of business.
Hence, the rates have been arrived on actuarial basis after factoring in the necessary assumptions. These rates have been compared with the rates that were published during the last few years. Based on the IRDAI’s past experience in determining the pricing, the data sets used and also looking into those segments where the actuarial pricing is quite high in comparison to previous year’s pricing due to apparently volatile loss ratios, the IRDAI has smoothened the rates up suitably.
With respect to Vintage cars segment, there is no substantial data of past experience. Therefore, a discounted price of 25% of the proposed rate based on the erstwhile Indian Motor tariff (IMT) is proposed, for those private cars certified as Vintage cars by Vintage & Classic Car club of India.
The details of proposed rates for the various classes of vehicles are tabulated below:
