Dismantling of Indian Motor Third Party Insurance Pool [IMTPIP], Loss Reserve, Solvency and Accounting issues

IRDA has in terms of its Order IRDA/NL/ORD/MPL/277/12/2011 dated 23.12.2011 and IRDA/NL/ORD/MPL/003/01/2012 dated 3rd January, 2012 directed dismantling of the existing IMTPIP with effect from March 31, 2012 and has specified inter-alia matters relating to pool reserves and account reserves.

 

The authority has since received representation from the General Insurance Council (Council) as to the unprecedented difficulty in giving effect to significant and exceptionally large liabilities arising following the dismantling of the IMTPIP in terms of aforesaid orders.

The authority has held consultations with the Standing Committee on Accounting issues on the matter. The Authority recognizes that some of the higher liabilities have arisen in respect of the past years following the judgments of Courts which could not have been anticipated while determining the actuarial Liabilities in respect of the past years. Further having regard to the facts and circumstances, the Authority issues this Order in exercise of the powers vested under Section 34 of the Insurance Act, 1938 after due consultation with the Consultancy Committee constituted under Section 110G and Section 14(2) of the IRDA Act, 1999.

Accounting Treatment

1.   The clean cut method of settlement and the closure of IMTPIP envisages that Pool Manager computes the total liability based upon the ultimate loss ratio at the lower end as estimated by the independent actuary appointed by the IRDA (Government Actuaries Department, UK in their report dated 1st September, 2011) and as reflected in the Pool accounts and not on any other basis. Such an estimate of the ultimate loss ratio is consistent with the Agreement entered into by all insurers and the GIC while constituting the Pool where they had jointly and severally agreed to follow the “fortunes of the Pool”. The effect of the aforesaid shall be accounted for on full settlement basis by an insurer. In addition, any liability, being the difference between the allocation method based on overall market share of the entire portfolio under the IMTPIP and the liability based on actual written policies of the insurer shall be accounted for by the respective insurer in the financial year ending March 31, 2012.

2.   The additional IMPTPIP liabilities upon re-estimation of actuarially determined liabilities relating to underwriting years 2007-08 and 2008-09 shall be accounted for and recognized in full in the financial year ending March 31, 2012 itself. The Pool Manager shall quantify the liability in respect of each insurer for this purpose.

3.   The IMTPIP liabilities upon estimation/re-estimation of actuarially determined liabilities relating to the financial years (accounting years as the practice is) 2009-10, 2010-11and 2011-12 following the dismantling of the IMPTIP shall be determined and such determined liabilities (Transitional Liabilities) shall be recognized by insurers by making an irrevocable choice to recognize the said transitional liabilities :

a.   Immediately in the financial year ending March, 2012; or

b.   As an expensed on a straight-line basis over up to the three years beginning with the financial year ending March 31, 2012.

c.   An insurer opting for (b) above, shall:

i)    disclose at the end of each financial year the amount of transitional liabilities that remains unrecognized; and the amount recognized in the financial year; and

ii)   shall ensure that the expense to be recognized in subsequent years shall not be less than the expensed that shall fall due on a straight line basis; and

iii)   in case the actual liability in respect of past years i.e. underwriting years until March 31, 2012 being more than the amount on straight-line basis, such additional liabilities shall be recognized in full, in addition to the amount falling due for recognition on straight-line basis.

Solvency

4.   Every insurer shall maintain a solvency margin which is the higher of:

a)   the solvency in terms of Section 64VA(1A)(ii) of the Insurance Act, 1938 reckoning in full the respective insurers liability. It is hereby clarified that for the purposes of determining the net incurred claims as mentioned in the clause cited, the term ‘three preceding financial years’ shall mean the years 2008=-09, 2009-10 and 2010-11. (OR)

b)   the solvency calculated as prescribed in IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 read with circular dated31.03.2006 reckoning the actuarially determined liabilities and recognized for in the manner referred to in clause 3 herein. Consequently para 9(i) of Order Ref: IRDA/NL/ORD/MPL/003/01/2012 dated 3rd January, 2012 stands modified as under :

As on 31.3.12   As on 31.3.13       As on 31.3.14

1.30                  1.40                      1.50

and thereafter at all times

c)   Every insurer shall submit certificate to the effect of compliance of the solvency margin requirements referred to herein, duly certified by the statutory auditor and the appointed Actuary along with the filing of the audited annual accounts.

5.1.      The dismantling of the IMTPIP would result in receivables and payables inter-se between the members of the IMTPIP. Such Receivables / Payables shall be duly recognized in the financial statements and the resultant assets and liabilities should be considered while computing the solvency subject to as provided in para 5.2 below;

5.2.      Clean Cut Settlement : In view of the above accounting for recognition of the transitional liabilities, the insurers shall inter-se settle the net liability synchronizing the settlement with the recognition of liability

Year                                               Settlement By

2007-08 (provisional)                     20th March 2012

2007-08 (final) 2008-09(final)         30th June 2012

2009-10(Final)                               30th June 2013

2010-11(final) & 2011-12 (final)     30th June 2014

Accordingly, the table given at 8(v) in Order Ref IRDA/NL/ORD/MPL/003/01/2012 dated 3rd January, 2012 stands substituted with 5.2 above.

5.3       While settling such inter-se net liability as set out in para 5.2 supra, the payer insurer shall allow for an interest at 7.50% per annum on decreasing balances beginning from 1.4.2012; the insurer may at his option settle the entire liability even earlier.

6.   Consequent to the dismantling of IMTPIP, for the year ended March 31,2012, the provisions of Authority’s circular dated August 24,2011 shall stand revised as under

a)   RSM 1: The insurer shall consider gross written premium directly underwritten by insurer in respect of its policies for Motor Pool business for the purpose of calculation of RSM 1 and

b)   RSM 2 : For the purpose of computation of RSM 2, the insurer shall consider gross incurred claim directly incurred in respect of its policies for motor pool business incurred by insurers including IBNR and IBNER of the said business.

7.   The following orders of the Authority remain in full force save as expressly modified herein

a)   Clause No.3 of the covering letter to R3 granted to all non-life insurers regarding maintenance of Solvency Ratio of 150%.

b)   Circular No.11/IRDA/ACTL/IBNR/2005-06

c)   Appointment of Government Actuary’s Department (GAD),UK vide Order No.Ref. IRDA/NL/ORD/MPL/046/03/2011 dated 12.03.2011 and summary of the report submitted by GAD, UK

d)   Order : IRDA/NL/ORD/MPL/276/2011 dated 23.12.2011

e)   Order : IRDA/NL/ORD/MPL/277/12/2011 dated 23.12.2011

f)    Order Ref: IRDA/NL/ORD/MPL/003/01/2012 dated 3rd January, 2012.

Sd/ J. Hari Narayan

Chairman