Insurance Companies advised to increase contribution to Motor TP Pool

The IRDA had conducted an audit of the Third Party Motor Insurance Pool and has established that the pool reserves have to be significantly augmented in order to meet the higher compensation to be paid to the unfortunate victims of road accidents. Such augmenting of reserves will strengthen the insurance companies and will enable them to meet all claim obligations at all times expeditiously and without fail.

The IRDA has required all general insurance companies to increase these reserves in a phased manner over a period of three years and till the reserves are augmented to a satisfactory level. companies have also been required to restrict their expenditure in terms of bonuses. incentives etc., besides bringing in additional capital as might be necessitated. 

The IRDA has also noticed that certain unhealthy competitive practices have emerged in the detariffed market and has also instituted steps to ensure that the Indian Insurance Market remains vibrant, strong and responsive to consume, needs.

Order under Section 14 of IRDA Act read with Section 64VA of Insurance Act’ 1938

1. The Authority had investigated Actuarial valuation of the Indian Motor Third Party Insurance Pool (IMTPIP) under the Insurance Act, 1938 in order to assess the adequacy of the reserves which are to be calculated as per the IRDA Regulations and in particular as per reference 4 cited.

The Report established that the ultimate loss ratios are 172.3%, 181.81,% and 194.15% for the years 2007-08, 2008-09 and 2009-10 respectively. Against this estimate, the pool has maintained reserves at 126% for all the years the pool has underwritten third party motor liability.

The report under Ref No. 1 was communicated vide letter cited under Ref No. 2 to the CMD, GIC, the pool Administrator and a meeting of the General Insurance Council was convened for consideration of the Report cited at 1 above. The General Insurance Council, responded vide letter cited under Ref No. 3 on behalf of the members of the pool.

2. The Council has made following submissions, regarding the loss reserves in their letter, among other things:
(i) All the Members of the Pool will make a tentative provision of 153% for the each of the four years from 2007-08 to 2010-11 for IMTPIP losses.
(ii) All the general insurers should be allowed to amortize the entire IMTPIP losses over three year period.
(iii) IRDA and IMTPIP together carry out peer review of the estimation of loss reserves carried out by Sri .K.P. Sarma.
(iv) Insurers may be allowed to lower the solvency requirement for IMTPIP business to 100% instead of 150%.
(v) The general insurers may be allowed to value their assets at fair market value.

3. The Authority has examined the representation of the general insurers and is satisfied that the non-life insurers have not complied with the instruction issued by the Authority vide circular cited at Sl. No. 4 and the license condition imposed cited at Sl. No. 5 and is of the view that the following measures are needed in the interest of orderly growth of insurance industry. The Authority recognizes liabilities as per the report submitted by Mr. K P Sarma, till such time the review ordered as below, is scrutinized and accepted by the Authority. Accordingly, the Authority under the Section 14 of IRDA Act, 1999 read with Section 64VA hereby directs as under:-

A. The report of Appointed Actuary of IMTPIP be subjected to peer review by an independent actuary appointed by the Authority.

B. The peer review shall:

i. arrive at loss reserves required for maintaining a solvency ratio of 150% as per the Insurance Act, 1938 and Regulations there under ;

ii. provide for the impact of the Hon’ble Supreme Court’s decision in the Sarla Verma case on compensation to be paid to accident victims, and

iii. submit the report not later than 30th June, 2011 and

iv. that the cost of such valuation be met by the IMTPIP

C.All the general insurers, including M/s GIC Re are hereby instructed:-
i. to maintain a solvency ratio of not less than 130% for all lines of business as on 31st March 2011, the IMTPIP losses being valued at an ultimate loss ratio of not less than 153% for all the years the pool was underwriting ,until the peer review report as ordered above is finalized,

ii. to maintain a solvency ratio of not less than 137%, 145% and 150% for all lines of business not later than 31st March 2012, 31st March 2013 and 31st March 2014 respectively. IMTPIP losses shall be valued and further provided for as determined by the Authority after the peer review report as ordered above is scrutinized and accepted by the Authority for this purpose;

iii. to maintain 150% Solvency ratio thereafter (ie. from 31st March, 2014), at all times;

iv. not to declare dividends to the shareholders without the prior specific approval of the Authority for any year or part of the year wherein the solvency ratio is reported below 150%;

v. to submit a financial plan as approved by the Board of Directors as per Section 64VA (2A) of Insurance Act, 1938, to the Authority within a a period of two months,indicating a plan of action to correct the deficiency for the said 3 year period up to March 2014. In addition, an annual plan duly approved by the Board of Directors shall be submitted not later than 15th of February every financial year starting from 2011-12 and a half-yearly review of Annual Plan reviewed by the Board of Directors shall be submitted not later than 15th August of each of the three years starting from 15th August 2011.

vi. to appoint full-time qualified and experienced Property and Casualty Actuaries to strengthen the actuarial department as required. They are permitted to utilize the services of actuaries qualified from Casualty Actuarial Society, USA and Institute of Actuaries, U.K and Australia if Actuaries having necessary experience and qualification under IAI are not available.

vii.not to disburse bonus, performance incentives etc by whatever name such payments are called to any key management personnel, the senior management, Appointed Actuaries, Whole time Directors of the Board or any of the CxOs without the prior specific approval of the Authority.

viii. to ensure that the pricing of products including discounts are in accordance with the underwriting principles and in conformity with the product as cleared by the Authority under File & Use Guidelines.

ix. not to exceed the limitations of expenses of management under Rule 17E of Insurance Rules, 1939 at any time.

4. All the non-life insurers are directed to submit the quarterly statements (viz., Quarterly Report on Accounting Transactions to the Board of Directors) prescribed under Circular No. IRDA/009/F&U/07-08 dated 14th May 2007 not later than 30 days after the end of the Quarter along with the Board Resolution concerned.

5. The Authority will review the applicability of each of the above instructions to such insurers who have achieved 150% solvency ratio on a sustainable basis on their specific application.

6. All the general insurers are directed to acknowledge the receipt of this Order and place this order before the Board of Directors well before the finalization of accounts.