One of the amendments proposed to the Motor Vehicles (MV) Act is to cap third-party liability cap at Rs 10 lakh in accident cases, according to insurance industry sources. Currently, the liability is unlimited.
While the proposal is being welcomed as "a friendly one for policyholders", the general insurance industry feels this may not translate into a reduction in premiums, at least in the short term.
The non-life insurance industry, citing the unlimited liability provision, has been asking for, and getting, regular upward revisions in third-party premiums.
The logical corollary to capping of liability would be a reduction in premium. But this remains uncertain.
"It is too early to predict whether the premium would go down. We see that the maximum limit proposed in the Bill is higher than the average claims for death and injuries being paid by the industry," R. Chandrasekaran, Secretary General, General Insurance Council, told IANS.
Moreover, it's also not clear how the courts would react to this.
"The impact of capping of liability would be felt by the insurance companies only after a couple of years, when the claims initiated on the insurance policies post amendment would be decided by the courts," Chandrasekaran added.
He said over a period of time the rates would stabilise to a safe, narrow band range and be affordable by all. "Volatility and uncertainty in the claim awards would be minimised, if not eliminated altogether," Chandrasekaran said.
The huge gap between the third-party premium earned by the industry and the claims paid is yet to be bridged, he added.
Ever since the industry was opened up, the premium for various risk covers has gone down -- except for the motor and health insurance policies.
While the premium for health insurance is fixed by individual companies based on their experience of claims, the rates for motor third-party are fixed by the Insurance Regulatory & Development Authority of India (IRDAI) for the industry as a whole.
The premium has been going up for those owning two-wheelers and private cars.
"As long as IRDAI is determining the third-party premium, there is perhaps very little possibility that it will come down. Insurers will find innovative means to influence IRDAI to get annual increases," former IRDAI Member K.K. Srinivasan told IANS.
Interestingly, as per the proposed amendments to the MV Act, the third-party liability premium would be fixed by the central government.
Insurers say that since the government has mandated third-party insurance for vehicles and the liability, the premium should also be mandated ensuring that the portfolio of insurers operates within sustainable levels.
"The current practice of fixing rates by the regulator (IRDAI) on the basis of a matrix formula, devised by actuaries, is an appropriate mechanism. It is felt that the government should allow IRDAI to continue fixing the rates," Chandrasekaran suggested.
Industry observers say that often vehicle owners do not realise that the primary responsibility towards a road accident victim was theirs.
"Capping of the liability for the mandated third-party insurance within the Act would help bring about a transformation in the owner of the vehicle. With the reduced accidents and safer roads for all road users, this capping, besides other measures, would certainly benefit all the stakeholders," Chandrasekaran said.
The quantum of claim awards given by the Motor Accident Claims Tribunal (MACT) in 95 per cent of death claims and 99 per cent of the grievous injuries were within the Rs 10-lakh cap proposed. The average payout per third party claim is less than Rs 550,000.
"The majority of the claimants would not be affected," Chandrasekaran added.
(Venkatachari Jagannathan can be contacted at firstname.lastname@example.org)