International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 INTERNATIONAL JOURNAL OF MANAGEMENT (IJM) 6510(Online), Volume

me 3, Issue 2, May-August (2012)

ISSN 0976 6367(Print) ISSN 0976 6375(Online) Volume 3, Issue 2, May- August (2012), pp. 335-347 IAEME: www.iaeme.com/ijm.html Journal Impact Factor (2012): 3.5420 (Calculated by GISI) www.jifactor.com

IJM
IAEME

MOTOR INSURANCE AND ITS INCREASING COST WITH FOCUS ON INDIAN MARKET - CAUSES, EFFECTS AND REMEDIES
1. T.Sivakumar, Research Scholar, School of Management, SRM University, & Assistant Chief Engineer, Traffic Lab, Quality Assurance and Research, Highways Department, Chennai,TamilNadu,India. sivakumar_0906@yahoo.co.in 2. Dr.R.Krishnaraj, Research Supervisor, &Assistant Professor, School of Management, SRM University, Kattankulathur Chennai,TamilNadu,India. rkraj6@yahoo.com

ABSTRACT
Globally Motor Insurance is the biggest and fastest growing General Insurance portfolio and India is no exception to it. It accounts to 41% of the total General Insurance premium in India. In the year 2011 the total premium for Motor Insurance is about Rs.14566 Crores 1, however at the time of Nationalization it was only Rs.25 Crores. The number of motor vehicles in India has gone up from 306000 in 1951 to 114951000 2in 2009. The main concern about the Motor Insurance or take any other General insurance is the ever increasing premium rate. This really frustrates the genuine buyers of this type of insurance. This paper examines the causes, effects and remedial measures on this issue. KEYWORDS: Motor Vehicle Act, Third Party Liability (TPL), Insured Declared Value (IDV), Underwriting 1. HISTORY OF INSURANCE In India, insurance has a deep-rooted history3. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. The insurance got its opening in 1912, since the Indian Life Insurance Company Act is enacted. The details of the important milestones in Indian Insurance 4industry is tabulated in Table 1.
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

TABLE 1 MILESTONES OF INSURANCE REGULATIONS IN INDIA

Milestones of Insurance Regulations in India

1912 1928 1938 1956

Significant Regulatory Event

The Indian Life Insurance Company Act Indian Insurance Companies Act The Insurance Act: Comprehensive Act to regulate insurance business in India Nationalization of life insurance business in India with a monopoly awarded to the Life Insurance Corporation of India Nationalization of general insurance business in India with the formation of a holding company General Insurance Corporation Setting up of Malhotra Committee Recommendations of Malhotra Committee published Setting up of Mukherjee Committee Setting up of (interim) Insurance Regulatory Authority (IRA) Recommendations of the IRA Mukherjee Committee Report submitted but not made public The Government gives greater autonomy to Life Insurance Corporation, General Insurance Corporation and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to Non-resident Indians and Foreign Institutional Investors The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority Bill Cabinet clears Insurance Regulatory and Development Authority Bill President gives Assent to the Insurance Regulatory and Development Authority Bill

1972 1993 1994 1995 1996 1997

1997

1998

1999

1999 2000

2. MOTOR INSURANCE Motor Insurance is a combination of two words motor + insurance. Motor as defined in Motor Vehicle Act5 is a self propelled vehicle. Insurance is the protection against unforeseen risk. The unforeseen risk is an accident which can not be foreseen ,which may or may not happen ,it may result in creation of liabilities or result into financial loss .Injuries, death to a person or persons and damage to a property is liability. Damage to the vehicle itself and theft of parts or the theft of the vehicle itself is financial loss. Motor insurance is thus protection against the risks in order to overcome the liabilities including financial losses associated with accidents The policy which is mandatory as per Indian Motor Vehicle Act is
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Liability only policy. But most of the people prefer Comprehensive policy which also covers the financial loss. 3. MOTOR INSURANCE IN INDIA In U.K ,1st Motor car was introduced in 1894 in 1895 1st Motor policy only third party liabilities was introduced in 1899 ,accidental damage to car was added (Comprehensive Insurance)in 1903 Car and General Insurance Company was established , mainly to transact motor insurance. Practice in India normally follows that of England. Motor Vehicles Act (MAV) was passed in the year 1939.Complulsory Third Party Insurance was passed on 1st July 1946.Motor Vehicles Act 1988 replaced the MAV 1939 and is effective from 1st July 1989. In India, motor insurance is an important part of the rules of the road. Therefore, it is necessary for every owner to get his vehicle insured. According to the Motor Vehicle Act 1988, every vehicle plying on the road or in public areas in India must be insured for the liability towards third party. It is the vehicle owners choice to get a comprehensive policy which includes the third party liability coverage. If caught without a valid insurance policy for the vehicle, the owner or the driver can be penalized for violation of the law. But though the TPL is compulsory by some studies the compliance is poor with an estimated 50% of vehicles not recovered. Presently, Motor Insurance in India accounts for about 41 percent of the gross insurance premiums written in the Indian non life market, or over Rs.14566 Crores with more than 4 Crore polices, which makes it the largest non-life insurance business today. The share of Motor Insurance in General Insurance 6for the past two years is 39% and 41% which is given in the Table 2. This clearly shows the importance of Motor Insurance in the insurance sector. Table 2 General Insurance Premiums Motor Insurance Rs in Crores 18,407.29 24,175.91 Health Insurance Rs in Crores 11,245.25 13,344.99 Others Rs in Crores 17,702.69 20,835.63 Total Rs in Crores 47,355.24 58,356.53 Percentage of Motor Insurance 39.00% 41.00%

Year 2010-11 2011-12

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May May-August (2012)

FIGURE 1
Share of General Insurance Premium in 2011 2011-12

36%

41% Motor Insurance Health Insurance 23% Others

4. MOTOR VEHICLES GROWTH IN INDIA India is one of the fastest growing automobile industries around the world. India became the fifth largest motor vehicle/car manufacturer7 in the world in 2011. Indian auto manufacturers produced a record 1.48 Crores motor vehicles in 2010. 0.354 Crore cars and commercial vehicles were produced in 2010 out of which 0.305 Crore were cars. Domestic passenger vehicle sales hit a new record in 2009 2009-10 (Apr-Mar) when over 0.195 Crore Mar) vehicles were sold. India is the largest manufacturer of three-wheelers (444,000 in 2009-10) three 44,000 2009 and the eighth largest commercial vehicle ( (5.3 Lakhs in 2009-10). India is also the largest 10). tractor manufacturing country (around 1/3 of global output) having produced around 370,000 units in 2009-10. The chart8 in Figure 2 shows the growth in sales of motor vehicles in India growth from 2003 to 2009. FIGURE 2

5. GROWTH OF MOTOR INSURANCE IN INDIA The insurance sector is a colossal one and is growing at a speedy rate of 1015% .Together with banking services insurance service add about 7% to the countrys GDP.
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As motor insurance is mandatory as per the law and due to the growth of motor vehicles in India, the motor insurance sector is growing at a very fast pace. The growth of Motor Insurance over the past three years6 had been shown in the Figure 3 below. The no of motor Insurance policy had gone from 30083880 to 4390729 i.e., a growth of 46% and the premium had gone from Rs.9350.31 Crores to 14566.47 Crores i.e., a growth rate of 55.79%.This clearly shows the pace at which this sector is growing. To be specific about the Car Insurance and its claims as shown in Table 3 and Figure 4 ,the number of policies had gone from 6383695 to 10100109 i.e., at a rate of 58.22 % and the premium had gone up from Rs.3886.59 Crores to Rs.6650.83 Crores. 71.12%.This is due to the economic growth of the country. FIGURE 3 GROWTH OF MOTOR INSURANCE OVER THE PAST THREE YEARS

Motor Insurance for the past Three years in India

43930729 50000000 30083880 28379890

Motor Insurance Premium for the past Three Years in India

20000.00 9350.31 10291.53 10000.00 0.00 14566.47

0 2008-09 2009-10 10 2010-11 No of Polices

2008-09 2009-10 2010-11 Total Premium Rs in Crores

Table 3 CAR INSURANCE POLICIES AND CLIAMS OVER THE PAST THREE YEARS Total Total Total Total Claims Incurred No of Premium Total incurred Sl.No Year paid Claims Polices Rs in Claims Claims Rs in Rs in Crores ratio Crores Crores 20081 64.14 2009 6383695 3886.59 1165928 2337.82 2492.88 20092 7138559 4722.89 1537282 2901.08 2950.80 62.48 2010 20103 10100109 6650.83 2276950 3962.81 4278.53 64.33 2011

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May May-August (2012)

FIGURE 4 Car Insurance Policies over the past three years

20000000 10100109 10000000 0 2008-09 2009-10 2010-11 6383695 7138559 No of Polices

6. INCREASING COST OF MOTOR INSURANCE IN INDIA The cost of Motor insurance had gone over the years. Even recently giving in to the giving long pending demand of the general insurance companies, the Insurance Regulatory and Development Authority (IRDA) of India has hiked the third party motor insurance premium9 by 10-65% across private and commercial vehicles with effect from April 25, 2011. The 65% insurance regulator has also agreed to the industry demand of annual review of third party premium rates. The premium of Private cars and two wheelers have been increased by 1 10% while for commercial vehicles the hike is 65%. The response to the hike from the Insurance Industry is that KG Krishnamoorthy Rao, managing director and chief executive officer, Future Generali India Insurance, though welcoming the hike, said that the quantum of the increase is not sufficient given the loss ratio in the commercial vehicle segment at 190%. "Ideally, the increase should have been 85-100%," he added. 100%," Earlier talking to MONEY TODAY, Amarnath Ananthanarayanan, chief executive executi officer, Bharti AXA General Insurance, had said the third party premium in the commercial sector should be increased at least by 80%. The third party insurance premium rates have been increased after a gap of 5 years. In a circular issued on April 15, 2011, the insurance 2011, regulator observed that "long intervals between rate revisions cast an avoidable strain on policyholders as well as on the insurance companies. Premiums need to be reviewed regularly depending upon the average claims which have been awarded by the various courts, awarded frequency of claims for each class of vehicle and inflation amongst other factors." A Bajaj Allianz General Insurance spokesperson said that the fact that IRDA has agreed to review the third party rates on yearly basis comes as a big relief to the industry. basis There are two kinds of motor insurance cover - cover against damage to one's own vehicle (own damage insurance) and third party insurance which covers the insured person if he is sued or held legally liable for injuries or damage done to a third party. Third party motor injuries insurance is mandatory by law and the premium rates are still under government control. I am having a car and two wheeler for the past 14 years. The cost of Insurance is always on the rise. Though the IDV decreases over the years the premium rate never seems to
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May May-August (2012)

change much. In the Figure 5. I had given the comparison of Insurance premium 10I had paid for my car (Ford Figo, Hatch Back) and my Two Wheeler (Hero Honda 100cc). go, 100cc).For the car which I purchased on 2009 the premium for the past two years are Rs.8530 and Rs 8350 the pas IDV of the vehicle is Rs.335160,Rs.319200 respectively. I have not taken up the premium of the first year as that is from a different Insurance Company which still charges a higher premium. And for my two wheeler the Insurance premium for the past four years are Rupees 871,796,792 and 822 whereas the IDV had decreased from Rupees 22020 to 17150. 17150.The details of discounts and premium exclusively for the vehicles are shown in Table 4. I still remium remember the premium I paid for the Two wheeler in 2005 was around Rs.800 only. This clearly shows that the premium had not changed much even the IDV of the vehicle had declined. And the coverage for the Third Party Liability had also not changed. Say for erage instance if the Cover was Rs.2 Lakhs ,the value of Rs .2 Lakhs is not the same in 2012 as in 2008 due to the inflation and other reasons. Then why the premium had not changed much? I had been driving vehicles for the past fifteen years and never met with an accident and claimed insurance for either the two wheeler or car. I had taken myself as an example only for a reference and this is the case of so many vehicle owners in India.

FIGURE 5 PREMIUM FOR A SAMPLE CAR AND TWO WHEELER INSURANCE

383515 400000 300000 200000 100000 0 2009-10 2010-11 11 2011-12 10000 538 Car Insurance Premium and IDV for the past three years Premium Amount IDV IDV 0 565 496 457 10073 8338 8243 30000 22020 20607 19600 20000 17150 335160 319200 Two wheeler Insurance Premium and IDV for the past 4 years Premium Amount in Rs

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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012) TABLE 4 CAR INSURANCE OVER THE PAST THREE YEARS
Name of the FORD FIGO Car Model 2009 Type HATCHBACK

Sl. No

Year

Premium Amount in Rs

IDV in Rs

Ratio Between IDV/Pre mium

Disco unts

Total Premium Amount(Inclu ding Third Party Liability and tax) in Rs

12408.00

Ratio Between Total Premium/I DV

Name of the Insurer

1 2 3

200910 201011 201112

10073 8338 8243

383515 335160 319200

0.0263 0.0249 0.0258 20% 25%

0.032 0.025 0.026

Future General India Royal Sundaram

8530.00 8380.00

TWO WHELER INSURANCE OVER THE PAST THREE YEARS Name of the Two HERO HONDA (SPLENDOR) wheeler Model 2005
Type 100CC BIKE

Sl. No

Year

Premium Amount in Rs

IDV in Rs

Ratio Between Premium /IDV

Discou nts (No claim )

Total Premium Amount(Inclu ding Third Party Liability and tax) in Rs

871 796 792 822

Ratio Between Premium/I DV

Name of the Insurer

1 2 3 4

200910 201011 201112 201213

538 565 496 457

22020 20607 19600 17150

0.0244 0.0274 0.0253 0.0266

35% 50% 50% 50%

0.040 0.039 0.040 0.048 ICICI Lombard

The main concern about the premium charged for Motor Insurance is that there is no marked difference in the premium between the vehicle met with accidents and the vehicles do not involve in accidents other than the discount (No Claim Bonus) for the insurance for the
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International Journal of Management (IJM), ISSN 0976 6502(Print), ISSN 0976 6510(Online), Volume 3, Issue 2, May-August (2012)

vehicle, please note that there is no discount for TPL. Why there is no much difference in the premium for the vehicles involved in accident and the vehicle not involved in accident?

FIGURE 6 NOTHING OTHER THAN THAT?

And to add much to the woe, the person involved in an accident any number of times can buy a new car / motor vehicle, can get the no claim bonus if the new vehicle doesnt involve in any accident. Only the vehicle involved in accident is not eligible for no claim bonus, the insurance companies never bothers about the person who is the main cause for accidents. It is the need of the hour ,that the Government and the Insurance companies shall take note of this dire situation and have a detailed analysis for the cause in increase of the Motor Insurance Premium and take necessary steps to give the due benefits to the vehicle owners who do not involve in accidents/do have no claims. 7. CAUSES FOR INCREASING COST OF MOTOR INSURANCE IN INDIA Inefficient underwriting: Claims ratios are high among Indian non-life insurers, especially government-owned insurers, due to less efficient underwriting practices. Private-sector firms have significantly lower claims ratios than public-sector players11. Underwriting ratio, like the combined ratio industry benchmark, it measures the percentage of premiums an insurer pays out in claims and expenses. The lower the ratio the better, since a higher ratio means expenses is eroding more premium revenues. Notably, when insurers were earning steady and substantial investment income, they could remain profitable by offsetting weakness in underwriting ratios with investment gains. After losing investment income in the crisis, many insurers have refocused on the fundamentals that drive the underwriting ratio.Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the insurance premium that needs to be charged to insure that risk. The function of the underwriter is to protect the company's
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book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk. Growth of Commission and Acquisition cost: Commission and acquisition costs grew in 2008, fuelled by motor insurance. Acquisition costs have been increasing as firms expand their distribution networks. Commission expenses have also risen due to increasing competition in the non-life segment. Acquisition costs for public-sector players are about two times that of private sector players. Risk on return on investments: Strong returns on safe investments have helped Indian non-life insurers to offset underwriting losses. Indias non-life insurers are largely invested in government securities, which helped mitigate crisis-related losses and has guaranteed above-average returns in recent years. However, infrastructurefund investments in 2006-08 did generate significant loss. Fraud: There have been fraudulent claims at many a times. This naturally affects the claim ratio of the Insurance companies which in turn affects the genuine buyers. Irrational Evaluation Costs: The valuation of the damage caused to the motor vehicles depends on the valuer .There may be possibility of bias in evaluating the costs. Young Drivers, Drunken Driving: Major portion of Accidents occur due to drunken driving and reckless driving by young drivers. But for not enabled for no claim bonus they were not affected in any way and their insurance premium is not hiked. Driver Behaviour and Irresponsible Driving: The attitude of Driver like reckless driving, over speeding, Tailgating and improper driving by not following the rules leads to traffic accidents , claims which in turn leads to increase in the insurance premium of all. Geographical Location: The geographical location wherein the vehicle certainly affects the probability of accidents and accident costs. The vehicle which is mostly driven in urban areas , the probability of involving in an accident is more and as per some studies the accident costs increases13 with traffic density. In the same way , vehicle driven in hilly terrain is more prone to accident. A study conducted by Edlin and Karaca-Mandic 14provided estimates of the size of the accident externality from driving. They found that traffic density increases accident costs substantially when measured by insurer costs or insurance rates. The state of the existing legal framework, deficiencies in the process of generating accident data and data sharing, and the enforcement of safety regulations in the motor transport industry are the most serious structural impediments to the operation of the Indian commercial motor insurance market. 8. EFFECTS INCREASING COST OF MOTOR INSURANCE IN INDIA: The increasing cost of Motor Insurance may lead to the vehicle owners drive without insurance, at the places atleast where the enforcement of law is not that strict. Without driving insurance may lead to hit and run cases where the innocent may be affected. This may lead this kind of drivers to adopt illegal ways to escape from the hands of law. This will spoil of the moral of the public. Inefficient and irresponsible drivers left unpunished may lead to continue the same practice of driving.

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Due to the increase in cost of insurance which is a burden for the people who drive on their own , very less kilometres per year and drive safely without accidents will have aversion in purchasing another vehicle . 9. REMEDIAL MEASURES TO CONTROL THE INCREASING COST OF MOTOR INSURANCE: The underwriting shall be done in an effective and efficient manner. By encouraging online system for new insurance and renewal of insurance on line system may be encouraged which in turn will reduce the commission costs. The Insurance companies should invest the money in a safe but effective way to avoid losses and earn as much as possible gains. The fraudulent claims should be avoided and punished severely if found out. The evaluation of damages should be uniform by following a standard practice with out any bias. The motor insurance industry in India should perform a critical role needed to enhance road safety by taking measures like penalizing poor driver performance through increased premiums or denial of cover. For liability insurance in India it is the vehicle, not the owner or driver, which is insured. Thus it is the vehicles accident record that impacts on the experience rating aspects of the insurance premium. Consequently, an owner or driver with a bad accident record can replace the vehicle and thus avoid an adverse experience-rated premium increase. It is recommended that switching to a system where experience-rated premiums attach to the owner and the driver, not to the vehicle, be taken up as a matter of high priority by IRDA. The drivers commits accidents and who drive in irresponsible ways like driving without license or permit, over speeding, not following the Traffic rules, Tailgating and other such mistakes should be booked and this should be intimated to the Insurance Company or some common organization ,in a way by which the premium for their next insurance shall be increased. IRDA should initiate the development of an integrated claims database. IRDA should also explore the creation of a motor insurance pool for bad drivers who have been denied cover by the insurance industry. The vehicles with necessary safety devices like airbags, ABS with EBD and other active and passive safety features shall be given reduction in premium. The Government should insist insurance companies to give considerable discounts in premium for the above of type of vehicles. According to the Insurance Institute for Highway Safety, Electronic stability control could prevent nearly one-third of all fatal crashes15. One study estimates the ESCs benefit-cost ratio as ranging from 4.1 in France up to 8.0 in Germany16. Though many insurers do grant lower premiums for safer cars and discounts for safety equipment. However, it is plausible that the current level of discounts offered today by insurers is lower than is socially optimal. Insurers can adjust the premiums to the marginal risk of driving by charging the drivers that drive more a higher premium. This is called the Pay As You Drive (PAYD) 17,18premium system. As mentioned above, this is expected to induce a significant and efficient reduction in driving and traffic accidents.
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The insurance premium may be charged according to the region in which the motor vehicle is mostly driven. Higher premium for metros and hilly areas and lower premium for other places19. CONCLUSION The Government of India and the Insurance Regulatory and Development Authority, though working effectively in controlling the Insurance Companies the motor insurance premiums are on the rise to the despair of the people. The Government and IRDA should take necessary initiatives to allow the vehicle owners who drive safely without involving in any accidents to ripe the benefit by giving discount in premium considerably. Further, vehicles with all necessary safety features shall be given considerable discount in premium paid. Insurance premium may be fixed based on the distance driven by the vehicle annually20. The drivers involved in accidents and reckless driving should be dealt severely and the insurance premium should be hiked according to the offence. It is the responsibility of the Government to take all effective initiatives to ensure that the insurers feel secured and satisfied with the premium they pay.

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17. Naval Saini, Indianzing Usage -based Motor Insurance, accessed through www.freewebs.com/navalsaini/.../PAYD_article_submission.pd 18. William Vickrey, Automobile Accidents, Tort Law, Externalities, and Insurance: An Economists Critique, 33 LAW AND CONTEMPORARY PROBLEMS 464 (1968) 19. Adapting best practices Insurance pricing. Online issue of IRDA Journal July 2012. 20. Aaron S. Edlin, Per-Mile Premiums for Auto Insurance, in ECONOMICS FOR AN IMPERFECT WORLD: ESSAYS IN HONOR OF JOSEPH E. STIGLITZ 21. S.M.Guptha, Motor Insurance , accessed through www.slideshare .net/smguptha 1947/lecture -5-motor-insurance ppt 22. Times of India, Business accessed on 28.03.2012. 23. Johar Bahru Insurance Motor Insurance Policy 24. Hand book on motor Insurance prepared by IRDA , accessed through www.irda.gov.in. 25. Karthick Srinivasan, Gaurav Jain, De-tariffing of General Insurance Sector: Impact and outlook. 26. A Aeron Thomas ,Project Report ,PR/INT/243/02,The Role of Motor Insurance Industry in Preventing and Compensating Road Causalities. 27. Car Insurance Premier, A guide to Auto Insurance, accessed through www.driveinside.com/broucher/car-insurance-guide.pdfomics/C229/ 28. Indian Insurance Industry-The task ahead, accessed through www.bellamyassocies.com/Insurance_Report.pdf 29. World Insurance Report 2011,accessed through www.capgemini.com/m/en/tl/World_Insurance_Report_2011.pdf 30. India, Voice of Customer-Time for insurers to rethink their relationships Global Insurance Survey 2012 accessed through http://www.ey.com/Publication/vwLUAssets/Global_Consumer_Insurance_Survey_2012__India/$FILE/0177_EY_GIR_INDIA_SML.pdf

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