ORDER NO. IRDA/NL/ORD/MPL/277/12/2011, DATED 23-12-2011
In exercise of the powers vested under Section 14(2) of the IRDA Act, 1999, the Authority issues the following order reforming the Indian Motor Third Party Pool System. The Authority hereby creates a declined risk pool for Act only Commercial Vehicle Third Party Insurance with effect from 1.4.2012.
The Authority has constituted Indian Motor Third Party Pool in the year 2007 by its order dated 035/IRDA/Motor-TP/Dec-06 dated 4th December, 2006 with an objective of ensuring free availability of third party motor liability policies of the commercial vehicle owners. During the year 2010-11, the Authority has reviewed the performance of the pool through a series of studies on the management, the financial aspects and the valuation of the liabilities of the pool by the pool administrator and the member companies. The Authority constituted Technical Committee on Commercial third Party Liability Cover vide its order no IRDA/NL/ORD/IMPL/212/12/2010 dated 17th December, 2010 to review the current arrangement of motor third party liability pool, to examine the possibility and modalities to be adopted for creating declined pool of commercial vehicles to ensure the availability of third party liability cover to all commercial vehicles, to examine the possibility to provide third party liability cover to the driver in addition to the vehicle. Further three sub-committees were formed to go into each of the issues. The sub-committee headed by Mr K.P Sarma, Consultant Actuary submitted the report which highlighted clear under-reserving and data inadequacies. In view of the alarming increase in the liabilities of the pool, inadequate provisioning by the member companies and due to the inefficient management of the pool by the administrator, the Authority appointed Government Actuary’s Department from UK to conduct the peer review of the report of the appointed actuary of the Pool. The review report states that given the significant data issues a precise estimate of the pool liability entails great uncertainty and also corresponding impact on the selection of loss development factors.
The Authority met the CMD’s of the Public Sector companies and made a presentation on the results of the motor third party pool on 9th December, 2011. The Authority followed this with communication dated 5th December, 2011 to the Secretary General, General Insurance Council seeking their views on the proposed declined risk pool. Simultaneously the Authority also addressed a communication dated 5th December, 2011 to the Transporters Association seeking their views on the proposed declined risk commercial vehicle pool. The Chairman, IRDA met the CEO’s of the general insurance companies on 15th December, 2011 to discuss the concerns of the general insurers on the proposed mechanism. Arising out of this meeting the Chairman, IRDA constituted a committee vide its order no. IRDA/Admn/ORD/MISC/273/12/2011 dated 15th December, 2011 to evolve consensus on the operational mechanism. The committee met on 21st December, 2011 and submitted its report to the Authority on 21st December, 2011.
Thus the independent review conducted by the Authority through various agencies has revealed that the current framework of the pool is severely affecting the financial viability of the general insurance sector due to alarming capital depletion in the sector. The analysis of the data also revealed huge inefficiencies in claim settlement by the companies reflected in the average claim ratio which differed by as much as 100%. This has a direct bearing on the policyholders interest as inefficient management will result in higher premium for commercial vehicle owners. The Authority after having examined the current framework of the pool and its financial management is satisfied that the pool in its form is eroding the interests of the policyholders and is also causing financial distress to the general insurance companies. In order to ensure that the sector grows in a healthy fashion and the policyholders interest is protected, the Authority makes the following order setting up a declined risks pool for third party commercial vehicle motor insurance with effect from 1.4.2012.
Framework for Indian Motor Third Party Declined Risk Insurance Pool for Commercial vehicles (Act only Insurance)
The purpose of creating the Indian Motor Third Party Declined Risk Insurance Pool for Commercial vehicles (Act only Insurance) is as follows:
(i) Equitable and fair sharing by all insurers
(ii) No supply side constraints
(iii) Simple to administer
(iv) To bring claims management efficiency
(a) The declined risk pool shall apply to commercial vehicles for standalone third party liability insurance (Act only insurance). No comprehensive motor insurance policy or part thereof shall be ceded to the pool.
(b) Miscellaneous and special class of vehicles falling under class code 23 of the erstwhile All India Motor Tariff shall also be excluded from the scope of the pool.
(a) All existing general insurers and every newly registered general insurer automatically shall be admitted as member of the Indian Motor Third Party Declined Risk Insurance Pool (Declined Risk Pool).
(b) Specialist insurers not licensed for motor insurance business shall not be members of the declined risk pool.
4. Participation in Indian Motor Third Party Declined Risk Insurance Pool
The cessions to the General Insurance Corporation shall be in accordance with the obligatory cessions which currently stands at 10%.
5. Declined Risk Pool Administrator
General Insurance Corporation shall act as the pool administrator of the Declined Risk Pool
6. Role and responsibilities of the Declined Risk Pool Administrator
(a) The pool administrator shall maintain accounts, premiums and liabilities as per the statutory requirements and file all returns as per the regulatory requirements.
(b) The pool administrator shall prepare and submit half yearly and annually audited accounts for the declined risk pool and also appointed actuary’s annual report.
(c) The pool administrator shall conduct periodical inspections of the member companies to assess their efficiency in settlement of claims and also verify the accuracy of the quarterly statements in respect of the pool business.
(d) Any member of the system shall be entitled to inspect the accounts and valuations of the system within 15 days.
7. Role and responsibilities of the declined risk pool member companies
(a) The insurer shall be responsible to deduct tax on payments where required and remit tax deducted at source to the appropriate Authorities.
(b) Automated transaction level data (data upload) shall continue to flow as at present, from the companies to the pool administrator. However data shall be sent not later than last day of the following month.
(c) The Appointed Actuary of the general insurer is to confirm in his annual report, the incorporation of all pool liabilities, including revisions, in the company’s accounts.
(d) The underwriting insurer shall be the lead insurer for all purposes including claims servicing.
8. Declined Risk Pool Mechanism
(a) The premium shall be reviewed annually based on the formula notified by the Authority in its order dated 15th April, 2011.
(b) The premium for declined risk pool shall be determined in accordance with the actuarial principles which shall be used by all the insurers and shall be notified by the Authority from time to time.
(c) The appointed actuary shall analyse and submit to the Authority the claims frequency, claims costs, expense inflation, investment, etc. considering the long tail of business and classify the rates for each classification like standard risks, sub-standard risks etc. at least on an annual basis and review all the loadings allowed for in the premium determination.
(d) An agency commission or brokerage not more than 1% shall be paid for third party motor insurance commercial vehicles.
(e) No ceding commission in respect of the business ceded to the declined risk pool shall be paid.
(f) GIC as administrator shall be paid a fee on actual cost basis.
9. Accounts & Audit
(a) It shall be obligatory on part of general insurers to segregate funds on account of the declined risk pool business in their accounts & invest them according to IRDA’s Investment Regulations.
(b) The transfer of funds between the insurers shall be through the declined risk pool mechanism on net basis.
(c) The general Insurers shall submit quarterly statements in respect of the declined risk pool duly audited by its statutory auditors.
(d) The business transacted by insurance companies on account of declined risk pool & investment of funds shall be confirmed by the statutory auditors in annual accounts of the company.
10. Proposal for third party insurance (Act only) for commercial risks
(a) A prospect wishing to take motor third party insurance (Act only) policy shall approach any of the general insurer for underwriting his risk.
(b) The general insurer shall accept the risk and underwrite to its own account based on the company’s underwriting guidelines or cede the same to the declined risk pool account in accordance with the underwriting manual filed with the Authority and cleared by it as per the File & Use guidelines.
(c) At no instance shall the insurer refuse to write the risk.
(d) Any refusal shall be seen as a violation of the Insurance Act, 1938 and shall invite penalty as per of the Act.
11. Parameters for ceding the proposals to the declined risk pool
(a) Each company will have its own underwriting manual having the underwriting parameters for accepting or ceding the risk to the pool, which shall be filed with the Authority.
(b) Any business which does not fall within the underwriting parameters of the insurer shall be ceded to the pool.
(c) The ceding insurers shall retain 20% of the individual risk to his net account (after obligatory cessions) and cede the balance to the declined pool.
(d) The retention of the risk or the cessions to the pool shall be strictly as per the filed underwriting manual of each company.
(e) The underwriting manual of the company shall be filed every year with the Authority before 31st January of the forthcoming financial year.
(f) However the underwriting parameters based on which the company shall accept or cede the risk to the pool shall be limited to (i) age of the vehicle; (ii) geographical parameters based on the registration of the vehicle and (iii) type of vehicle based on the tonnage for Goods Carrying Vehicles and passenger seating capacity for Passenger carrying vehicles; (iv) Such other parameters which the Authority may decide from time to time.
(g) Every company shall get the cessions to the pool audited by its statutory auditor who will certify compliance to the underwriting guidelines filed with the Authority.
(h) The cessions to the pool shall also be audited by the pool auditors.
(i) The codes and sub codes necessary to capture this information shall be standardized to facilitate effective monitoring and data transfer to the pool.
12. Premium rates for motor third party declined risk pool
Premium for motor third party insurance for commercial vehicles shall be same whether underwritten to its net account or ceded to the declined risk pool.
13. Manner of calculating the obligations:
(a) Every insurer shall underwrite (excluding reinsurance) a minimum percentage of standalone (Act only) commercial vehicle motor third party insurance which shall be in proportion to the sum of fifty percent of the company’s percentage share in total gross premium and fifty percent of the total motor premium of the industry in the current year.
(b) The amount of standalone (Act only) commercial vehicle motor third party insurance premium to be fulfilled by every insurer in the current year shall be arrived at by multiplying such percentage as derived in 13(a) with the total amount of standalone (Act only) commercial vehicle motor third party insurance premium in the current year.
(c) The fulfilment or shortfall of the mandatory obligations as prescribed in 13 (b) above shall be determined based on actual premium written on the net account of the insurer and premium retained with respect to the business ceded to the declined pool.
(d) The declined pool shall be extinguished at the end of every underwriting year on a clean cut basis, by transferring the risks at par to the members who have not fulfilled their mandatory obligations. Such transfer shall be in proportion of the shortfall of each member company.
(e) The Authority constitutes a committee headed by Chairman, General Insurance Council, representatives of GIC, 2 public sector companies and 2 private sector to work out the methodology for transfer of risks amongst general insurers. The committee shall give its report to the Authority by 28th February, 2012.
(f) The business ceded to the declined risk pool shall be shared in the manner given in Annexure “1”.
14. Appointed Actuary of the Company
The Appointed actuary of the general insurer shall be responsible for determining provisions for liabilities for motor third party insurance which is written to company’s account and cross-checking that written to the declined risk pool account.
15. Appointment of Grievance Redressal Officer
Every general insurer shall appoint a grievance redressal officer to look into the grievances of the policyholder/prospect/customer on the nonavailability of motor third party insurance and shall submit a report on monthly basis to the pool administrator with a copy of the same to the Authority outlining the steps taken by the company to ensure compliance to the regulations.
In order to ensure that general insurers fulfil their motor third party insurance obligations, monthly reporting of premiums and no of vehicles insured state-wise shall be furnished to the Pool Administrator and Authority in the attached format on a monthly basis and any reports prescribed from time to time.
Example of Sharing of business ceded to the declined risk pool
Total Act only Commercial Vehicle Motor Third Party Premium (excluding for Misc D class of vehicles) = Rs 100 crs
Motor share of 4 companies: A – 10%; B – 20%; C – 30%; D – 40%
|Company||Sum of fifty percent of company’s share in the total gross premium and fifty percent share in the total motor premium||TP mandatory obligations(Rs. in crores)||Actual Done(Rs. in crores)||Given to Pool(Rs. in crores)||Net Retention(Rs. in crores)||Shortfall(Rs. in crores)|
Sharing of Pool: A – Nil; B – 20/22 × 2; C – 20/ 22 × 10: D – 20/22 × 10