Capping of Motor Insurance Liability: Irrational and Unwarranted

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Capping of Motor Insurance Liability: Irrational and Unwarranted

Bhagwati Prakash

The Proposed Motor Vehicles (Amendment) Bill- 2016, introduced in the Lok Sabha on 9th August 2016to shield the general insurance companies of the country by capping their liability to Rs. 5-10 lac incompensating the holders of third party vehicle insurance policies in the country in case of a road mishapwould render millions of registered vehicle owners, vulnerable by subjecting them to random, blind andunlimited risk to pay balance damages. Exposing the millions of third party motor insurance policyholders, contributing almost Rs. 21,242 crores as premium per annum, just to protect the fortunes of the 27general insurance companies of the country through a statutory amendment is beyond any tenablerationale. Vehicle owners in the country, numbering 21 crore, and a majority of them, inspite of having athird party insurance policy, will now run the risk of paying accident claims out of their own pockets incases, wherever the damages would exceed over and above Rs. 5 Lacs in cases of grievous injuries and Rs.10 Lacs in cases of death, if this proposed amendment is passed. This proposal, would foil the sole purposeof vehicle insurance. The basic aim of insurance is to defray individual risk collectively over a vast groupof premium contributors, especially when the risk apprehended is likely to be beyond all the means ofindividuals. It is beyond imagination for any sane person that a small taxi or lorry owner dwelling in aslum-hut, or a middle or lower middle class car owner would be able to meet the damages out of hispocket, if they exceed over the stipulated cap of Rs. 5-10 lacs. These damages may go to 20 lac, 50 lac, 1crore or even more in some cases. Even, for any middle income group policy holder, who may even beowning a small house or apartment and some assets, it would be difficult to pay damages by liquidating allhis/her assets. A policy holder buys an insurance policy solely to safeguard himself and his family frombeing ruined out of waggeries of any fatal accident, if it ever happens and any liability to a third partyarises against him/her. The sole purpose of insurance is to mitigate the risk, which is beyond individual’ scapability.

This act of exposing majority of the 21 crore registered vehicle owners, having a third party insurance policy to such a random, blind and unlimited risk, to pay damages, themselves over and above Rs. 5-10 lac, inspite of their buying an insurance cover, just to guarantee higher profits to 27 general insurance companies amounts to arbiter in their favour, against millions of poor unorganized policy holders. For years since 1956, the public sector insurers were offering third party vehicle insurance at much lower premiums. Cross subsidisation from one product to the other has been a standard practice and is the need of hour for social and economic justice. All the public sector general insurance companies had been in overall profits, even after such cross subsidisation inter se different products, even when the claims to premium ratio was above 200 percent. Indeed, in cases where the claims to premium ratio is high and the claims exceed over the premium collection, it is not the company which has to bear it. The companies

normally go for reinsurance, and the reinsurance companies reimburse such excess damages. Such reinsurance companies thrive on this business of providing reinsurance for a vast number of companies and make overall profits. So, there appears no necessity for the government to worry, just to marginally reduce the reinsurance premium of third party vehicle insurers.

It is true that the premium collection in 2015-16 from third party motor insurance was only Rs. 21,242 crores and the companies have been saying that the claims to premium ratio is now 140%. Though this ratio is much lower than earlier, yet, the overall premium collection in general insurance is Rs. 96,394 crores, which helps them to have enough cushion to pay reinsurance premium to get excess liabilities reimbursed. Thus, this deficit of theirs is also being defrayed via reinsurance, and not a direct liability over the general insurance companies. So, it is matter of some what higher outgo of reinsurance premium only. Therefore, in case of payment of full damages too, the insurance companies are not required to bear the entire burden of excess damages over premium collection, as it is being reimbursed by reinsurers. But, it would be highly nightmarish for hundreds of thousands of vehicle owners who shall have to bear the damages over this limit of Rs. 5 or 10 lacs and all such families would be ruined, if the damages to be paid to the victims or heir of victims in case of accident exorbitantly exceed the limits. In all such hundreds of thousand cases the vehicle owner at times may not be able to pay the damages over this cap being
proposed even after selling all his/her family assets, including the house or hutment owned by him/her, if
any. No single company is going to incur losses and turn bankrupt, even without any such cap, but hundreds of thousand of middle and lower middle class families would be rendered bankrupt after enactment of these limits who might be required to pay claims above the caps. Moreover, in majority of road accidents the claims are much less than the caps being proposed. In India 5 Lac road accidents are

being reported every year in which 1.5 lac people lose their lives. The focus of the government should be to curb road accidents through improved traffic monitoring and other means, emulating other countries instead of exposing poor policy holding individuals and families to unlimited risks, which might totally ruin hundreds of thousand of such families, aimed just to help the insurance companies save some petty sums on reinsurance.

Moreover, looking towards the poor ratio of claims to premium in motor insurance segment the InsuranceRegulatory and Development Authority (IRDA) has already hiked the vehicle insurance premiums by 25 to40% for 2016-17. For small cars the third party motor insurance premium is raised by 40% from Rs. 1468to Rs. 2055 and for SUVs and luxury cars, it has been raised only by 25% from Rs. 4931 to Rs. 6164.Likewise, for other vehicles as well, the professionally competent statutory regulatory authority, the IRDAhas raised the premiums in line with the risk and liability involved. Therefore, now where is the need forthe government to worry for these companies and cap their liabilities. Worried upon to help the 21 privategeneral insurance companies to add few crores into their profits and, enabling them to save these fewcrores of Rupees, being spent upon reinsurance. If insurer is not required to compensate the true loss, whatdoes insurance mean?

The basic and universal doctrine of insurance or the idea behind insurance is to secure the policy holder,unable to foot a hefty bill of damages, if something untoward happens. If the victim or the legal heirs of avictim of road accident are entitled for claim of Rs. 20 or 50 Lacs or even more say Rs. 1 crore, then aftercapping of liability through this proposed amendment, the insurance company would be liable to pay onlyup to Rs. 5 Lac in cases of grievous injury and up to Rs. 10 Lacs in cases of death. The balance damagesshall have to be borne by the vehicle owners out of the 21 Crores vehicle owners, majority being verypoor, would not be able to bear this hefty damage, even after liquidating all their family assets. Indeed,when this proposed law would limit the liability of insurer, who his making fortunes out of insurancebusiness, and subject the policy holder to unlimited risks, would create chaos after every fatal accident,numbering 5 lacs per annum.

It is more than strange that the proposed amendment also mandates that the central government wouldprescribe the base premium and the liability of an insurer in relation to such premium for a motor

insurance policy, in consultation with the IRDA. Today, when the IRDA, an expert body has been takingcare of premium determination and has been duly revising of every year to take care of insurers’ interestswhere is the need to arbiter in favor of their companies? Prior to the entry of foreign players the claims topremium ratio of public sector companies was above 200%. Yet, they all were afloat via reinsurance. It hasnow come down to 140% in 2015-16 and would further dip below 110% after this year’s premium revision,for 2016-17. Situation can be further improved in favor of the insurance companies, merely by a furthermarginal increase in premium. Therefore, rendering majority of the 21 crores poor vehicle owners holdinga third party insurance, vulnerable by exposing them to random, blind and unlimited risk, especially whenthis 40% excess of claims over premium is not at all a direct burden of insurance companies as they alsogo for reinsurance is unwarranted and unjust. The companies have to bear only a marginal cost in the formof reinsurance premium out of their total revenue. So this proposed amendment Bill needs to bereconsidered