Non-life insurers violate law offering premium discount on 3rd party insurance

The cut and pay system is one where the insurers collect a lower sum than what is stipulated but print the actual premium figure on the policy. Incidentally rebating premium by anyone is an offence under the Insurance Act

Are vehicle owners are being raped by the non-life insurers by charging more than a just price? It seems so, if one goes by a question that was raised in the Lok Sabha by the Congress party member from Kerala, Hibi Eden.

And there cannot be a smoke without a fire goes the adage. Eden had asked Finance Minister Nirmala Sitharaman whether the government is aware of the 'cut and pay' system practiced by some private non-life insurers in the case of vehicle third party insurance?

The cut and pay system is one where the insurers collect a lower sum than what is stipulated but print the actual premium figure on the policy.

In a written reply, Minister of State for Finance Bhagwat Karad told the Lok Sabha: "IRDAI (Insurance Regulatory and Development Authority of India) has informed that they have not received any complaint raising the issue of difficulties faced by individual agents of public general insurance due to cut and pay system of some private insurers who offer third party premiums below the tariff but printing the tariff rates in policy."

Industry officials said that some non-life insurers are adopting this system to gain business. Incidentally rebating premium by anyone is an offence under the Insurance Act.

"General insurers are given a target of selling a certain number of vehicle third party insurance policies. This target they do not want. In order to fulfill the target, the companies come out with a campaign to sell third party liability policies where such premium discounting happens," a senior industry official said not wanting to be quoted.

The IRDAI has stipulated the target of third party vehicle insurance sales to general insurers as they avoid selling the same burden falls on the public sector general insurers. From June 1, the motor third party liability insurance premium has been jacked up by the Central government despite the portfolio being hugely profitable for the insurers.

Contrary to the claims made by the general insurers that they are incurring huge losses under the motor portfolio, the actual numbers as per the Insurance Information Bureau of India (IIB) and studies by industry lobby body General Insurance Council show the contrary.

As per the Indian Non-Life Industry Year Book 2020-21 published by the General Insurance Council, the total premium earned under the motor insurance was Rs 67,389 crore by the industry. The industry invests the sum and earns income on this as well.

The total claims paid during 2020-21 was Rs 28,726 crore towards vehicle damage Rs 17,834 crore, towards third party liability Rs 10,892 crore, netting the industry a whopping surplus of Rs 30,854 crore.

The total number of third party claims settled during the year was 257,165. The average settlement per claim was Rs 423,541. During 2019-20, as per the data published by the General Insurance Council, the total motor insurance premium earned by the industry was Rs 68,951 crore - vehicle damage Rs 26,524 crore, third party liability Rs 42,427 crore.

The total claims paid for 2019-20 was Rs 38,071 crore - towards damage to vehicles at Rs 20,552 crore and third party liability at Rs 17,519 crore.

The gross surplus was a whopping Rs 30,880 crore. The total number of third party claims settled during 2019-20 was 403,283 with an average pay out of Rs 434,409.

In its annual report on motor insurance for the 2018-19 fiscal, the IIB said a sum of Rs 35,519 crore of motor claims - towards vehicle damage Rs 18,262 crore and third party liability Rs 14,257 crore - were settled during 2018-19, while the gross underwritten premium was Rs 64,522.35 crore.

According to the report, the average settlement amount for death claims during 2018-19 fiscal was Rs 901,207 while for injury claims it was Rs 251,094. The blended average works to Rs 576,150 per claim.

From the numbers above, one can note the decreasing average per claim amount from 2018-19 to 2020-21. The industry players also claim that a large number of vehicles run on the roads without third party insurance. However, they do not have any answer when asked how that impacts them as they pay claims only on those policies issued by them and it is for the police to penalise the violators.