As per the Authority’s order no. IRDA/NL/NTFN/MOTP/066/04/2011 dated 15th April 2011, the Authority would review and adjust the premium rates for motor third party insurance covers annually based on the formula as given hereunder:
P (t) = C1 (t) * CII (t-1) + C2 (t)
P (t) is the motor TP premium applicable to the financial year ‘t’,
CII (t-1) is the Cost Inflation Index for the year ‘t-1’ as notified by CBDT, and
C1 (t) and C2 (t) are the parameters applicable to the financial year ‘t’ whose values shall be determined and notified by the Authority in each financial year based on the experience measured in terms of average claim amounts, frequency and expenses involved in servicing the motor TP business. The values of the parameters C1 (t) and C2 (t) may vary according to the class of vehicle.
Accordingly, the Authority had reviewed and adjusted the premium rates for the FY 2012-13 vide its order no. IRDA/NL/NTFN/MOTP/076/03/2012 dated 27th March 2012. Subsequently, one of the affected parties approached the Calcutta High Court against the subject order of the Authority. The Honorable Court upholding the order of the Authority directed the IRDA “that in future the appellants shall disclose the factual data to be taken into account for the revision and the working of the formula on the basis thereof. They shall invite objections which should be taken into account before the rate is actually revised”.
In view of the above, the Authority hereby issues this exposure draft on revision of premium rates for motor third party insurance and invites comments on the proposed rates.
A. The Factual Data:
The Authority has made use of the data available with the Insurance Information Bureau (IIB) for the experience period of the Underwriting Years (i.e. Policy Years) 2007-08 and 2008-09 in respect of no. of policies, no. of claims reported and amount of claims paid up to 31st March 2012. The data is given in Annexure I.
B. The working of the Rate Revision:
· The data has been provided by the IIB for the underwriting years 2007-08, 2008-09, 2009-10 & 2010-11.
· The data includes no. of policies, no. of claims intimated, amount of claims paid and also the claims amount outstanding as on 31st March 2012 for each subclass of vehicles and for each PY
· The claims paid position is as on 31st March 2012. Since motor TP business is long tail business (it takes many years before the ultimate position of claims paid is known), it is very important to develop the immature losses as on 31st March 2012 to their ultimate positions. This is equally applicable to the no. of claims as well.
· The Authority has made use of the “Claims Development Analysis of Motor Third Party Claims” as done by the Insurance Information Bureau (IIB) to project the no. of claims and amount of claims to their ultimate positions. This is done by applying the age-to-ultimate development factors on the current values of no. of claims and amount of claims as on 31st March 2013 for each PY (i.e. 2007-08 and 2008-09)
· The Authority has then estimated the expected ultimate frequencies and severities for each class of vehicle
· In addition to loss development to its ultimate level, it is important that the losses are adjusted for any trends in frequency and/or severity. Accordingly the losses are trended from the experience period to the future period during which the rates will be applicable.
· After adjusting for management expenses (variable expenses) and fixed expenses, the Authority has then arrived at the premium rates to be charged.
· The claims development pattern is as per “Claims Development Analysis of Motor Third Party Claims” as done by the Insurance Information Bureau (IIB).
· For classes where there is no separate analysis done by the IIB, the Authority has considered the development pattern for that class equivalent to the group to which it belongs to. For example, for class code 19, we have assumed development pattern as per the development pattern of (17 to 23) group.
· It is observed that the Underwriting Years 2009-10 and 2010-11 have been developed only to the extent of approximately 30 % to 35 % and 10 % to 12 % respectively of their ultimate claims paid positions. Due to this low level of claims development for these years, any abnormal (extremely high or low) values of claims paid against these years could distort the ultimate position of claims paid. The Authority has therefore selected the Underwriting Years 2007-08 and 2008-09 as the experience period as these are developed approximately 70 % to 75 % and 55 % to 60 % respectively of their ultimate claims paid positions.
· The business mix of subclasses within a vehicle class does not change substantially over the next year
The values of the parameters C1 (t) and C2 (t) and thus the premium proposed for the financial year 2013-14, i.e. for the period from 01st April 2013 to 31st March 2014 are given in Annexure II. The parameter C1 (t) incorporates the frequency, severity and the variable expenses for the subclass; whereas the parameter C2 (t) incorporates the fixed expenses. It is observed that in any given vehicle class, there is a large variation in premium changes amongst the various subclasses. It is therefore proposed that the subclasses be clubbed together and a single revision be made for the vehicle class as a whole. For example, for private cars, the increase would be 38.87 % over the previous year’s premiums of all its subclasses.
The premium increase for the classes ‘E’ and ‘F’ is drastically high. One reason for this is the lack of sufficient data in respect of these types of policies.
The data is not available for two classes: Class F (ii), and Class B: Trailers. As there was no data available for class F (ii), the Authority has assumed the same % increase for class F (ii) as that for the class F (i). In case of trailers (Class B), there was no increase in premiums in 2012-13 over the previous year, i.e. 2011-12. Looking into the range of increases in premium of all other classes and also the increase in Cost Inflation Index over the previous year, the Authority is of the view that the premiums for this class be increased by 10 %.
As per directions of the Honorable Calcutta High Court, the Annexures I and II are enclosed herewith (please download the attached .zip file) giving the factual data and also the proposed premiums for the financial year 2013-14.
In view of the above, all stakeholders are invited to provide their comments on this draft proposal so as to reach the Authority, also by e-mail addressed to email@example.com, on or before 01st March 2013.