Team AckoJan 17, 2024
The insurance regulator is always looking for ways to make your life easy by creating laws to help you get maximum insurance coverage and reduce your out-of-pocket expenses. One of such rules is about ensuring fair compensation to the third party affected by commercial vehicles. IRDAI (Insurance Regulatory and Development Authority of India) directed insurers to create a Third-party Car Insurance pool so that no third party is exposed to losses. Let's understand this concept in detail.
Multiple general insurance companies came together to organise a pool of funds to pay for third-party losses incurred by commercial vehicle owners. This was done upon the directive issued by IRDAI.
The collected third-party premium is added to this pool for reinsurance purposes (insurance to cover the insurance company’s risk). This enables insurers to provide sufficient compensation to the affected third party, as directed by the Motor Accident Claims Tribunal (MACT) for the losses they have suffered.
Here is the list of reasons why the Third-party Insurance pool was formed.
A Third-party Insurance pool was formed because data showed that insurance companies could not cope up with the heavy losses of third-party incidents.
Insurers’ focus shifted to selling other types of insurance products that comparatively fared better profits than Third-party Liability Plans.
The issue worsened over time, and people who were affected by insured vehicles did not receive sufficient compensation in time.
The Third-party Motor Insurance pool was first created in the year 2007 and cancelled in 2012. The primary reason for the failure was that insurance companies suffered significant losses even after bearing third-party expenses collectively.
The regulator proposed a new type of Third-party Car Insurance pool. This is called the Third-party motor insurance “declined pool”. This will mandate all types of general insurance companies (small and large) to underwrite third-party policies strictly as per the laws. They cannot underwrite more than their actual market share.
As mentioned earlier, general insurance companies still suffered large amounts of losses by paying third-party commercial vehicle claims. The pool proved to be ineffectual as group payouts did not negate losses.
Here is an example to understand the issue better.
Say a leading insurance company (company ABC) invests in the Third-party Insurance pool. The insurer’s market share (say 20%) will determine the amount of premium they receive and the portion of the claim they must pay. Suppose there are Rs. 5 lakhs in the pool and a claim for Rs. 7 lakhs was incurred.
In this case, the premium will be Rs. 1 lakh for company ABC (20% of Rs. 5 lakhs) and the claim payout will be Rs. 1.4 lakhs (20% of Rs. 7 lakhs). The company thus pays Rs. 40,000 out-of-pocket.
Earlier, general insurance companies could underwrite larger portfolios for third-party policies and retrocede (get insurance on the insurer’s risk) the amount from the pool. This created an imbalance between pool investments and payouts. Companies with larger market shares had to bear more losses. Timely payout started getting affected, and the third party was exposed to financial losses after incurring injuries or damages.
Also, read: Is Third-party car Insurance really useful?
A declined risk pool is created to provide backup to insurance companies so that a third-party claim can be paid out successfully. Insurance companies can decline underwriting a policy for a certain vehicle type if they find it more risky than other types of vehicles. If this happens, another insurance company can act as a backup and settle the car insurance claim with the help of a decline risk pool. This is the basic idea behind the working of a declined risk pool.
The administration of the declined risk pool will be overlooked by the General Insurance Corporation of India (GIC). They will review premiums and payout annually to keep track of the seamless working of the pool. On the other hand, insurance companies will submit audited transaction reports to the GIC in each quarter of the year.
The regulator (IRDAI) has been extremely clear about what is expected from the Third-party Car Insurance pool. The idea behind it is to offer fair, sufficient, and timely compensation to the third party affected by a commercial vehicle.
Third-party motor insurance premium is not expected to increase as there are no changes in Third-party Liability policies. What has changed is the way the pool works. This pertains more to insurance companies and not to motor vehicle owners.
To understand the significance of Third-party Car insurance claims we need to first understand the coverages of this plan. A Third-party Liability policy offers insurance coverage against death/disability, injuries, or property damage to a third party when they get hit by the insured vehicle.
In most cases, a third party is the victim of an accident and is usually not at fault and they must receive compensation for the losses. Thus, a Third-party Motor insurance policy is highly important for the IRDAI.
It is because the regulator decides the price and coverage of a Third-party Motor Insurance policy. General insurance companies cannot decide the premium and coverage of this plan. Thus, a Third-party policy is considered a standard product sold by different insurers in India.
Even though a Third-party plan holds higher importance, it does not provide coverage for your damaged vehicle.
Consider two scenarios where you first buy only a Third-party plan and then a Comprehensive Policy. If you get into an accident, say you hit a tree and your car got damaged. Here you cannot claim for damage repair on your car if you only own Third-party car insurance policy. But you can raise a claim against your Comprehensive plan and get money to repair the damages.
This is the basic difference between a Third-party policy and a Comprehensive plan.
|Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please go through the applicable policy wordings for updated ACKO-centric content and before making any insurance-related decisions.
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