General insurance companies making windfall gains on motor books; should refund motor premiums to customers

With the lockdown being extended till May 3, the Indian roads have virtually grounded to a halt with vehicles lying idle. With no moving traffic, motor insurance claims filed have dropped by more than 70% and approved claims could drop much more.

Typically, 80-85% of the consumers’ premium amount is set aside by insurance companies for claim reimbursement. Since there are far fewer claims, a decent fraction of this amount could be a windfall gain for motor insurers. Insurance companies are obligated to refund these motor premiums to consumers in proportion to the duration of the lockdown.

Motor insurance companies in the US have already refunded 10-15% of annual premiums back to customers. GEICO is returning $2.5 billion in auto-premiums to policyholders, Progressive $1.5 billion and StateFarm $2 billion. In the UK, Admiral is refunding £25 for each of the 4.4 million cars and vans it covers. This adds up to a refund of £110m in premiums. Unfortunately, none of the major motor insurers in India has stepped forward to do so.

The total premium value to be refunded in India is a significant amount. It can be as high as Rs 5,700 crore. In FY 2019, motor premiums added to Rs 64,000 crore premiums. Of this 81% of the premium amount went to pay claims. Assuming all vehicles are idle, and the lockdown duration remains 40 days, the refundable amount is (Rs 64,000 crore) x (81% claims ratio) x (40/365 days) = Rs 5700 crore cumulative. For a car insured for Rs 30,000, this translates to a 9% refund or Rs 2,700 for the consumer. So far the Finance ministry has only extended the validity of third-party(TP) motor insurance for policies with renewals due in the lockdown period. This is to solve for consumers unable to make payments owing to the Covid19 situation. However, this affects a fraction of premiums but says nothing about actually refunding premiums on idle cars for the duration of lockdown.

The stock market has responded. ICICI Lombard and New India Assurance company have seen a 40-50 percent surge in their share prices since March 23 outperforming BSE Sensex which rose by 19 percent. General insurance companies are expected to see strong growth in their health insurance books along with lower claims on the motor insurance front.

Below we can address some of the common counter-points given against the idea of Indian insurers refunding motor premiums to consumers.

Insurance companies lose during calamities like floods so they can be allowed to gain right now

Insurance company actuarial models are designed to price in large losses like floods. No actuarial models of insurers anywhere in the world expect to gain from an unforeseen, once in a lifetime event like the Covid-19 pandemic.

Health claims on health insurance front will negatively impact general insurance companies during the pandemic

Motor and health insurance books have their profit and loss statements managed separately within insurers, and one is not necessarily used to offset losses in others. Further, it is not a given that health claims would actually rise, they might drop too since people are at home.

General insurance companies have been historically unprofitable

No company remains in a business if they expect to be unprofitable indefinitely. The industry is currently in a growth phase capitalised by public and private markets. They expect to turn profitable in the future.

General insurance is highly regulated compared to the west with prices for third-party insurance set by IRDAI

While this is true, insurance companies also enjoy regulatory benefits. Third-party insurance is mandatory to buy with every vehicle creating demand for motor insurance products, even for the lesser regulated OD product. Further, it is very hard, close to impossible, for new entrants to get a general insurance license, creating a gated market for existing players. While there are 20+ players in motor insurance, it’s surprising no one has announced meaningful steps to refund premiums which could also be a marketing and branding opportunity.

There is also an expectation in some quarters that IRDAI may defer expected increase in third-party premiums (to account for yearly claims inflation) this year to mitigate the reduction in motor claims. This would be a problem-solution mismatch, more regulatory intervention is not the ideal solution to this problem. It would be better if private players came together and announced premium refund or credit schemes without having the need for IRDAI to step in.

Source: The Economic Times