The independent review conducted by the IRDA through various agencies revealed that the current framework of the Pool is severely affecting the financial viability of the non-life insurance segment due to its alarming capital depletion.
The IRDA, after having examined the current framework of the Pool and its financial management, opined that the pool in its existing form was eroding the interests of the policyholders and was also causing fi nancial distress to the non-life insurance companies.
Accordingly, the IRDA issued an Order (No. IRDA/NL/ORD/MPL/277/12/2011 dated 23rd December, 2011) creating a Declined Risk Pool for Liability Only commercial vehicle third party insurance with effect from 1st April, 2012.
The purpose of creating the Indian Motor Third Party Declined Risk Insurance Pool for Commercial vehicles (Act only Insurance) is to ensure (i) equitable and fair sharing by all insurers; (ii) no supply side constraints; (iii) simplicity in administration; and (iv) to bringing about efficiency in claims management.
The declined risk pool shall apply to commercial vehicles for standalone third party liability insurance. No comprehensive motor insurance policy or part thereof shall be ceded to the pool. GIC Re shall act as the pool administrator of the Declined Risk Pool. At no instance shall the insurer refuse to write the risk. Any refusal shall be seen as a violation of the Insurance Act, 1938 and shall invite penalty as per of the Act.
Parameters for ceding the proposals to the declined risk pool:
Each company will have its own underwriting manual laying down the underwriting parameters for accepting or ceding risk to the pool, which shall be filed with the IRDA. Any business which does not fall within the underwriting parameters of the insurer shall be ceded to the pool. The ceding insurer shall retain 20 per cent of the individual risk to his net account (after obligatory cessions) and cede the balance to the declined pool.
The underwriting parameters based on which the company shall accept or cede the risk to the pool shall be limited to:
- age of the vehicle;
- geographical parameters based on the registration of the vehicle;
- type of vehicle based on the tonnage for goods carrying vehicles and passenger seating capacity for passenger carrying vehicles; and
- such other parameters which the IRDA may decide from time to time. Every company shall get the cessions to the pool audited by its statutory auditor who will certify compliance to the underwriting guidelines filed with the IRDA. The cessions to the pool shall also be audited by the pool auditors.
Manner of calculating the obligations:
Every insurer shall underwrite (excluding reinsurance) a minimum percentage of standalone commercial vehicle motor third party insurance which shall be in proportion to the sum of fifty per cent of the companyâ€™s percentage share in total gross premium and fifty per cent of the total motor premium of the industry in the current year.
The declined pool shall be extinguished at the end of every underwriting year on a clean cut basis, by transferring the risks at par to the members who have not fulfilled their mandatory obligations. Such transfer shall be in proportion of the shortfall of each member company.
Appointment of Grievance Redressal Officer:
Every non-life insurer shall appoint a grievance redressal officer to look into the grievances of the policyholder/ prospect/ customer on the non-availability of motor third party insurance and shall submit a report on monthly basis to the pool administrator with a copy of the same to the IRDA outlining the steps taken by the company to ensure compliance with the regulations.
Methodology of Transfer of Risks:
The IRDA under Para 13(e) of its Order No. IRDA/NL/ORD/MPL/277/12/2011 dated 23rd December, 2011 had constituted a Committee headed by Chairman of General Insurance Council. The other members include representatives from GIC, two public sector non-life insurers and 2 private sector non-life insurers to work out the methodology for transfer of risks amongst non-life insurers.
The IRDA, after taking into consideration the report submitted by the Committee on suggesting methodology for transfer of risks of Indian Motor Third Party Declined Risk Pool, issued the following Order:
- The transfer of risks between companies shall be on portfolio basis to members in deficit of obligations in proportion to their share of the pool with servicing of each risk by the policy issuing company.
- The pool liability for the underwriting year will be extinguished on a clean cut basis at the end of every year with net cash payments being exchanged between the ceding and receiving companies on the basis of Ultimate Loss Ratio (ULR) estimated by the Pool Actuary.
- The ceding company shall retain 20 per cent of the premium to its account, cede as per the obligatory cessions in force to GIC (currently 10 per cent of the premium) and cede the balance (currently working to 70 per cent of the premium) to the declined risk pool.
- The estimates of ULR for the business written by the insurer for the declined pool shall be as per above bullet point 2. The estimates of ULR for the business written to its own account fully may be as per their Appointed Actuaryâ€™s estimate.
- The pool actuary shall estimate the ULR for the declined risks based on the data that exists for the past five years and the insurers shall make provisions as per the latest year ULR, until the underwriting yearâ€™s ULR is estimated. These estimates shall be provided by 31st March, 2012.
- The estimation of ULR for the declined pool risks shall be completed by the pool actuary by following May of each underwriting year starting from 31st May, 2013.
- The ULR may be determined by the poolâ€™s appointed actuary and approved by the IRDA based on a peer review, if required.
- The declined risk pool shall make quarterly provisional cash settlements amongst its participants.
- Such quarterly settlements shall be on a year to date basis and to be finally adjusted based on the year-end ULR as approved by the IRDA.
- The quarterly settlements shall be done in 45 days from the end of the quarter and the final settlements shall be done 45 days from the date on which the ULR is approved by the IRDA.
- The non-life insurers participating in the declined risk pool shall take up an advertisement campaign on the declined risk pool with the message focused in English, Hindi and other Indian languages intensively. The message should be simple and shall be in the form of cut & keep.
- GIC Re shall also participate in the declined risk pool as a member and shall also follow the clean cut methodology of the declined risk pool.
Courtesy IRDA Annual Report 2011-12