Order No. IRDA/NL/ORD/MPL/003/01/2012, dated 3-1-2012

Ref. :

1.  Clause No. 3 of the covering letter to R3 granted to all non-life insurers regarding maintenance of solvency ratio of 150%.

2.  Circular No. 11/IRDA/ACTL/IBNR/2005-06

3.  Appointment of Government Actuary’s Department (GAD), UK vide No Ref.: IRDA/NL/ORD/MPL/046/03/2011, dated 12-03-2011

4.  Summary of the Report submitted by GAD, UK

5.  Order: IRDA/NL/ORD/MPL/276/12/2011, dated 23/12/2011

6.  Order: IRDA/NL/ORD/MPL/277/12/2011, dated 23/12/2011

* * *

1. In accordance with the Order No Ref: IRDA/NL/ORD/MPL/046/03/2011, dated 12-03-2011, the Authority had appointed Government Actuary’s Department, UK to evaluate the liabilities of the Indian Motor Third Party Insurance Pool (IMTPIP) under the Insurance Act, 1938 in order to assess the adequacy of the reserves which are to be calculated as per the IRDA Regulations and in particular as per reference 2 cited.

2. The GAD’s Report cited under ref. no. 4 estimated the ultimate loss ratios for the years 2007-08, 2008-09, 2009-10 and 2010-11 respectively. GAD has used various approaches to provide a range for the expected ultimate liability for TP pool as given below in view of significant data constraints and uncertainty in the claims developments.

TABLE 2.1

Year Lower end Higher end
2007 159% 197%
2008 188% 233%
2009 200% 249%
2010 213% 263%

3. Against this estimate, the pool has maintained reserves at 153% in accordance with the aforesaid Order cited in 3 for all the years the pool has underwritten third party motor liability.

4. GAD has recommended the selection of the higher end of the range as a point estimate in view of the following reasons:

 i.  Significant limitations in the existing pool data

ii.  Uncertainty reflected in the estimate’s of the pool liability due to data problems and impact on the selection of loss development factors

iii.  Pool claims experience

5. That would result in projected ultimate loss ratios of 197% to 263% as given in the Table 2.1. The above loss ratios also include GAD’s estimate of the impact of the 2009 Supreme Court ruling in the Sarla Vemra case and the 2010 Supreme Court ruling in the Arun Kumar Argawal case.

6. In view of the Authority’s analysis and also the GAD’s report on under reserving, data inadequacies and performance of the pool administration, Authority ordered the

 i.  dismantling of existing Indian Motor Third Party Pool with effect from 31.03.2012, as cited in 5 above and

ii.  setting up the framework for Indian Motor Third Party Declined Risk Insurance Pool for commercial vehicles to create equitable and fair sharing by all insurers as cited in 6 above.

7. In the background of dismantling the existing Indian Motor Third Party Insurance Pool, it is expected that each insurer who has booked the business will bring in efficiency in claims handling and undertake suitable actions to bring in data quality. In this context, due to expected improvements in the process of managing the business and the claims, it is herby directed that all insurers shall hold reserves considering the ultimate loss ratios at the lower end estimate of GAD for each of business written as given in the Table 2.1.

8. In accordance with the above, the committee referred in the order cited in 5 shall be responsible to ensure that the process of dismantling on a clean-cut basis in a timely and efficient manner, following the procedure given below. The committee shall:

  i.  Evaluate the outstanding liability (Ultimate Liability as per the market share (in accordance with the ultimate loss ratio at the lower end estimate of GAD) less the claims paid as per market share) for each insurer which is arrived as per the respective market shares.

 ii.  Evaluate the outstanding liability for each insurer which is arrived as per the premium actually written by each insurer on the basis of GAD report cited at 4.

iii.  Estimate the increase or decrease in outstanding liability on the basis of actual premium written for each insure for each year of business written and monitor the transfer of monies between the insurers in accordance with the change in the liability, if any for each insurer.

iv. Submit the report to the Authority within two months from the date of this order indicating for each insurer and for each of year of business the outstanding liability as per market share, the outstanding liability as per the actual business written, the net position, the amount to be transferred in/out.

 v. Ensure that the insurers shall bring in the additional capital, if any, to meet the total outstanding liability for the dismantled pool, after adjusting for the increase or decrease in the outstanding liability between the insurers, in a period of five years as per the table below:

TABLE 8.1

Year of business Lower end Total liability to be met in the year
2007 159% 20/03/2012
2008 188% 20/03/2013
2009 200% 20/03/2014
2010 213% 20/03/2015
2011 Based on the GAD’s estimate intimated by the Authority 20/03/2016

      *Total Outstanding Liability for the pool: Ultimate Liability in accordance with the ultimate loss ratio at the lower end estimate of GAD less the claims paid.

9. In this regard, in partial modification of the order cited in 3, all the general insurers, including M/s GIC Re are hereby instructed:

(i)  to maintain a solvency margin of not less than the percentage as indicated in the following table for all lines of business with effect from 31st March 2012 till the next five years, subject to the condition that the IMTPIP reserves being valued in accordance with the lower end of the ultimate loss ratio as indicated in the Table 2.1 above for each year.

TABLE 9.1

31st March 2012 31st March 2013 31st March 2014 31st March 2015 31st March 2016
1.10 1.20 1.30 1.40 1.50

(ii) to maintain 150% Solvency ratio thereafter (i.e., from 31st March, 2016), at all times;

(iii) not to declare dividends to the shareholders without the prior specific approval of the Authority for any year or part of the year wherein the solvency ratio is reported below 150%;

(iv) to submit a financial plan as approved by the Board of Directors as per Section 64VA (2A) of Insurance Act, 1938, to the Authority within a period of two months, indicating a plan of action to correct the deficiency for the said 5 year period up to March 2016. In addition, an annual plan duly approved by the Board of Directors shall be submitted not later than 15th of February every financial year starting from 2012-13 and a half-yearly review of Annual Plan reviewed by the Board of Directors shall be submitted not later than 15th August of each of the three years starting from 15th August 2012.

(v) to appoint full-time qualified and experienced Property and Casualty Actuaries to strengthen the actuarial department as required. They are permitted to utilize the services of actuaries qualified from Casualty Actuarial Society, USA and Institute of Actuaries, U.K and Australia if Actuaries having necessary experience and qualification under IAI are not available.

(vi) not to disburse bonus, performance incentives etc. by whatever name such payments are called to any key management personnel, the senior management, Appointed Actuaries, Whole time Directors of the Board or any of the CEOs without the prior specific approval of the Authority.

(vii) to ensure that the pricing of products including discounts are in accordance with the underwriting principles and in conformity with the product as cleared by the Authority under File & Use Guidelines.

(viii) not to exceed the limitations of expenses of management under Rule 17E of Insurance Rules, 1939 at any time.

10. The Authority will review the applicability of each of the above instructions to such insurers who have achieved 150% solvency ratio on a sustainable basis on their specific application.

11. All the general insurers are directed to acknowledge the receipt of this Order and place this order before the Board of Directors well before the finalization of accounts.

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