Motor insurance losses for general insurance companies may exceed 230 percent in FY19, a sharp rise from their current level of around 140 percent.
This means for every Rs 100 collected as premium, Rs 230 will be paid out as motor accident insurance claim.
The increased losses are because the rise in motor third party premiums was not as much as the industry had anticipated or wished for.
In addition to this, the Ministry of Road Transport and Highways has now made it mandatory for insurance companies to pay out a minimum of Rs 5 lakh to road accident victims claiming third-party insurance.
The move was made keeping in mind the increasing cost of living. This is a ten-fold increase from the earlier proposed amount of Rs 50,000.
"Motor premiums only went up by 10-15 percent this year on an average as against a demand of 30-40 percent. We are facing high claim ratios in third party motor and the situation is set to worsen after the Rs 5 lakh mandatory third party claim," said the head of claims at a mid-size private life insurance company.
Due to this, the industry may take an estimated hit of Rs 12,000-15,000 crore. This will go up as the compensation amount increases in January 2019.
For FY18 as well, motor loss ratios were high for insurance companies. For example, state-owned New India Assurance had an underwriting loss of Rs 2,525 crore in FY18 (compared to Rs 3,547 crore in FY17) driven by high claims in health and motor third party insurance.
Adding to the pain is the fact that the government has said that insurance claims on and from January 1, 2019 will see an annual increase of 5 percent.
Motor third party insurance is mandatory for all vehicles running on Indian roads. The owner of the vehicle needs to buy such a policy.
If a vehicle owner meets with an accident that results in the death of an individual, be it another vehicle owner or a pedestrian, the insurance company will pay the death benefits.
There is no cap on the maximum insurance compensation that can be sought by the kin of a victim of a road accident.
Insurance companies have sought a cap on the compensation that can be paid out in case of death. They have sought that over and above that, individuals can buy an unlimited third party insurance cover.
"If there is a 5 percent increase every year, the insurance regulator should also make provisions for individuals to pay a higher premium since claims have been on the rise every year," said the chief financial officer of a state owned general insurer.
The insurance regulator takes into account the demands of the transporters' lobby and also that of customer forums, before taking a decision on the final rate of premium increase in TP segment.
Over and above this, the Insurance Regulatory and Development Authority of India has said that every insurer, during a financial year, will underwrite such minimum percentage of the 90 percent of the overall motor TP insurance business premium of the industry for the immediate preceding financial year.
Motor insurance consists of third-party and own damage segments. While TP covers liability for third-party accidents, own damage covers damage to self and the owned vehicle. Prices for motor third party are revised every year by the insurance regulator category-wise and engine-capacity wise.