Wednesday, August 7, 2013

Motor Vehicle Insurance: Taking people for a ride…2

Benefits limited, Tensions unlimited

Let’s compare cricket and golf. In cricket the players field their own hard across the lengthy outfield, dirty their clothes and even suffer injuries while taking a catch or diving dangerously. In comparison a golfer simply strikes the ball, pats himself on the back and orders the caddie to pick up the ball. In the same way - insurance companies want to retain all their hefty margins but the moment there is a chance of a loss - they run to the government  and want unevenly competitive laws. That's not what a fair game should be...

By Neeraj Mahajan

There are many situations in life where you can't have the best of the both worlds, eat a banana without having to peal it. Ice creams- particularly softies are served in a crusty outer cone, which you have to accept even if you dont like it.  Every rose stem has a thorn. That is the minimum risk involved. Similarly in business, if you wish to roll in big profits, you have to be prepared for losses. Ideally no one likes to make a loss but when you are not sharing your profits with anyone, why should you expect others to share your losses? This is the logic.

But who will explain this to the sulking bad boys in insurance sector who play the game till the goings is good, but approach the umpire (IRDA), the moment they see a red marks in their balance sheet. They want to tilt the level of the playing field in their favor. As far as IRDA and government of India, is concerned, instead of safeguarding the interest of the common man, they allow themselves to be used as a caddie or errand boy of the insurance companies.

To understand things in perspective let’s compare cricket and golf. In cricket the players field their own ball even if it requires them to run across the lengthy outfield, dirty their clothes or suffer injuries while taking a catch or diving dangerously. In comparison a golfer simply hits a ball, pats himself on the back and ushers the ball boy or caddie to go and pick up the ball. That’s the background of this story. 

Now the present twist in the story…is that under pressure the private players in the highly organized Insurance lobby, the Ministry of Finance is proposing to move a Bill in the coming parliament session which seeks to omit motor vehicle insurance clauses from the Motor Vehicles Act, 1988. Nothing new, you might say as the government has been consistently doling out sops to the insurance companies, just to keep them happy. But the issue this time is, what would you prefer their happiness or that of the masses –the millions of faceless Indians who go in for an insurance policy not to ever file for a claim and are content with just the ‘no claim’ bonus? The present move seeks to delete Section(s) 140 to 173 of the Motor Vehicle Act of 1988 and usher in a new act called "Motor Vehicles Insurance and Compensation Act, 2011". All this is as per the recommendations of the Kaul Committee, headed by Oriental Insurance CMD R.K. Kaul and a few other representatives from the insurance industry.

In a parallel development, the government is planning to introduce another diluted version of the insurance laws (amendment) bill as per the recommendations of Parliamentary standing committee on finance headed by Yashwant Sinha. The bill proposes to limit Foreign Direct Investment (FDI) in insurance sector to 26% instead of 49% as the earlier version had proposed. The Yashwant Sinha Committee had said that instead of seeking foreign capital, companies should tap the domestic market to meet their needs. The bill also proposes to increase the time period beyond which a policy can’t be questioned on the ground of misstatement from 2 to 5 years.

Both these bills are just the kind of support the limping the insurance sector needs to stand on its feet. The insurance lobby’s plea is that motor vehicle insurance is unprofitable business which seems to be getting from bad to worse. For every Rs 100 of premium earned by insuring trucks and buses (on third party) insurers end up paying Rs 122 as claims. Because of high speeds without corresponding widening of roads, accidents particularly those involving large vehicles are going up in India leading to a number of third party fatality or disablement claims. Insurers instead prefer insuring cars or two-wheelers, as, for every Rs 100 collected as premium the claim payout is just Rs 55.

Some of the salient features of the proposed Motor Vehicles Insurance and Compensation Act, 2011 bill include:

  • A cap or upper limit of Rs. 10 lakh on third-party compensation or on the liability arising out of death or body injury caused to a third party by any vehicle on road. At present third party insurance is unlimited.
  • The draft Bill proposes impounding of the vehicle involved in the accident by the police till the disposal of the claim petition.
In keeping with the saying, one man’s tonic is another’s poison, these moves are being seen as a serious setback for the largely disunited commercial vehicle owners, the 70 lakh unorganized truck and bus operators, 1.6 lakh transport companies, 350 Tourist Transport Operators recognized by the Ministry of Tourism, Government of India and those recognized by the state tourism authorities.

Besides pushing up the transport hiring charges for foreign tourists, the current move may prove to be the proverbial last nail on coffin of the tourist transport sector, already reeling under the weight of exorbitantly high Central and State Government taxes in India which promises to develop as a tourism hotspot in the next decade up to 2018 and is expected to be the second largest employer in the world by 2019. Almost 20 million people are now working in the tourism industry. Tourism is an important source of foreign exchange earnings in India from more than 5 million annual foreign tourist arrivals.

Let’s for a moment consider the equation between the dramatis-persona or stakeholders involved. On one side is the victim that is the person who has been affected in the accident. He has lost his life, limb or has been injured… with due respect needs to be compensated. Next is the driver of the vehicle– he is either guilty- he may have been drunk, fatigued, negligent and inexperienced or not guilty, but we are not getting into that. Let’s for a moment consider that he is guilty, than whose fault is it? Obviously the owner, who employed him to drive his bus but then the owner may say he just hired a person with a valid driving license from the transport department and it was the duty of the state and the licensing authority to know that he possessed a basic minimum and acceptable driving skill. So why don’t we say that the transport department is equally responsible because they gave a commercial driving license to a person without proper training and testing merely because he paid a bribe of couple of thousand rupees? Next let’s analyze the role of the insurance company which has been paid ‘X’ amount of money as premium to insure the vehicle. The point to be noted that the company has been paid to ensure and is hence duty bound to deliver its part of the deal i.e. pay the sum insured to the accident victim as third party liability. How then can we just let the insurance company off the hook and pass on the onus of responsibility of paying the insurance claim to the driver who might say he doesn’t have that kind of money. The driver may also leave the job and join any other transport company. What’s there to prevent him from doing so? He may even get a new driving license made in some other name. Many long distance drivers are known to carry such documents to hoodwink the traffic police and to ensure that their original license stays clean.

In effect this means that either the owner allows the bus to be impounded by the police or pays the insurance claim to keep his bus moving on road. Let’s also understand the economics-- a Volvo bus usually costs around Rs 80 Lakh. Incase its financed without even taking into account any operational or maintenance charges– as a combined effect of the premium, interest, fitness and taxes only– the owner is paying Rs 3-4,000 per day just to keep it parked outside his office. On the contrary if it goes for tourist hire, it atleast earns Rs 7-8,000 per day in terms of profit. So the owner in any case in under pressure to ensure that the vehicle is operational.

And what is his involvement in the accident? He was not even present on the spot.  How can you then put all the blame on him and let everyone else involved go scot free? This is the greatest mockery of justice and miscarriage of justice. And by the way why are we going soft on the insurance companies? They are no holy angels. In the name of justice and fair play we should also point a finger at them for hoodwinking the law and duping customers by making big promises at the time of collecting the premium but trying their level best to avoid paying insurance claims. The question is how can the government of India be a party to this loot—there is no other name for it? 

“All this amounts to black-mailing. The Insurance Company is liable to pay the claim -- be it of Rs 10 or Rs 10 Lakh. That’s what they have charged premium for. It would be unfair to pass on the buck to the owner of the vehicle who may or may not be in a position, to shell out the compensation. What will happen, the victim will have to go through a longer period of emotional and physical torture and if that does not happen there might be protracted litigations leading to further delays in getting the just compensation.” says Indian Tourist Transporters Association, President Sarbajeet Singh.

They say every coin has more than just two sides. So let’s for a moment, look at the various angles of the story. Let’s assume that the government per say has no axe to grind and is merely acting in good faith, for what to save the insurance industry? But then who do you save, the victim or the perpetrator? What we need to consider here is: what is the track record of the insurance companies is India? Have they played a positive or negative role in respect of the common man? Are they just and fair in their dealings? In that case – when you did not even spare A Raja who was a minister in the Government of India and many others – why a different standard is being adopted for the private insurance companies?

Now the plea taken by the insurance companies is that they need soft cushions to contain the heavy losses they have been suffering both in terms of operating losses from frauds and claims. We will go into both the aspects but in the meanwhile it is a fact that the general insurance industry is facing huge losses to the tune of 10,000 crore on account of third party
motor pool losses. The question is who is responsible – you, who is managing the show or the Prime Minister of India? If we were to accept losses as the plea for granting undue concessions again and again than – the same logic should be extended to Vijay Mallaya’s Kingfisher. Tomorrow he might stand up and say I am facing difficulty to pay salaries to my employee – please ask Reserve Bank to print a few notes. This way government of India would become the biggest charitable organization – fulfilling the needs of each and every loss-making and public and private enterprise.  

Again the question is how much is too much? The insurance sector has made it its business to come up with a fresh demand within days of fulfilling the last. At their behest, Government of India and IRDA had increased premiums on trucks and buses up by 80 per cent and 10 % for cars and two-wheelers. In addition to hike in rates this time, a new assurance of annual increments was given to them. The saving grace however was that instead of succumbing to the insurance lobby’s remand to raise the premium rates by 150 per cent, the IRDA scaled it down to 70 per cent. Earlier, the insurance regulator had dismantled the third-party motor pool and replaced it with a declined motor pool to reduce losses in the motor insurance segment

As far as the losses are concerned, who is responsible for it anyways? The entry of 17 private insurance companies in the insurance sector which a monopoly of GIC and LIC in India, has led to an intense price war, stiff competition and aggressive marketing strategies being adopted. Here we will focus on just the third party motor insurance segment. A close look at the trends reveals a pattern of premium rates being reduced, discount to the extent of 40 to 60%, commission to the tune of 25 to 35%. This has increased the claims cost exorbitantly while reducing the premium income. On its part the IRDA, has failed to evolve an effective system of checks and balances over the nefarious activities of the insurers who do not have proper underwriting or loss prevention measures. In the absence of any damage control measure the portfolio continues to bleed. No outsider is involved in this so who is responsible for these irreparable losses?

(To be continued)

Also Read:

Motor Vehicle Insurance: Taking people for a ride… Part 1

Motor Vehicle Insurance: Taking people for a ride…3