The motor insurance business for general insurers in India has witnessed a sea of change over the past two years, owing to the spate of regulatory changes. The IRDAI’s move to scrap the long-term own damage motor insurance with effect from August 1, will yet again impact general insurance companies.

According to the IRDAI’s circular, insurance companies will not be allowed to offer long-term own damage (OD) cover — five-year in case two-wheelers and three years for cars — from August 1, on new vehicles. While this could imply some dip in float or investable asset base (lowering returns) and impact long-term OD business of cars and two-wheelers, better pricing of motor policies in future (rather than the aggressive pricing seen last year), sentiment boost aiding vehicle demand and increased opportunity in the standalone OD segment are positives for insurance companies.

In the near term, however, the motor portfolio will continue to be impacted by subdued growth in new vehicles sales, no hike in third party premium rates, and lower renewals.

Past headwinds

The mandatory long-term third party insurance that kicked in September 2018 changed the motor segment of the business for insurers over the past two years.

The mandatory long-term insurance required customers to take mandatory five-year TP cover for new two-wheelers and three-year cover for cars. But the customer had the discretion to either take OD cover also for the longer term, or just for one year and then subsequently renew it in the coming year. While TP rates are decided by the IRDAI, insurers have the flexibility to decide on the OD cover premiums.

Insurers vying for the more profitable motor OD business have been competing intensely on pricing, which led to a fall in overall OD premiums in the industry. This led to an increase in claims/loss ratio in FY20 for the industry, as claims ratio is the ratio of claims incurred to net earned premium (lower premium on account of reduced pricing). The weak auto volumeshad also impacted the business.

For ICICI Lombard, the loss ratio in motor OD increased to 68.9 per cent in FY20 from 59.2 per cent in FY19. The pandemic outbreak and the lockdown has further impacted the motor business, with new vehicle sales hit badly. Also, the IRDAI had given a forbearance on renewal of third party motor policies falling due from March 25 to May 3 (payment can be made on or before May 15). This has also impacted the renewal business.

The regulator had also notified that insurance companies have to continue to charge third party premium rates that were applicable for FY20, and the earlier hike in TP rates for FY21 will not apply until further notice.

All of this — lower premium growth, lower renewals, and no hike in TP rates — is expected to impact motor insurance business of general insurance companies in the near term.

IRDAI’s move

The IRDAI’s move to scrap long-term OD cover offered by insurers will impact insurance companies’ business in multiple ways.

One, leading insurance companies that have been writing long-term OD business over the past year, will lose that portion of the business going forward. Based on some reports and management commentary, long-term motor penetration in two-wheelers and cars may be around 15-20 per cent.

Two, this would lower (but by a small portion) the float or investable asset base. Insurance companies collect premiums upfront and pay claims afterwards. This creates a float or investable asset base that can be deployed to generate returns for shareholders. Hence, the scrapping of long-term OD cover would impact the float somewhat. As such, fall interest rates has lowered the realised return on investment book for insurance players over the past year. For instance, for ICICI Lombard, the realised return has come down notably to 7.9 per cent in FY20, from 9.4 per cent in FY19.

But on the positive side, the IRDAI’s move would help bring back sanity in the OD segment. The intensifying price competition in the motor long-term OD had come to a point where it had started to hurt the industry. Hence, rational pricing of OD policies going ahead should help premium growth and reduce loss ratio.

Also, the optically higher cost of insurance owing to long-term OD cover had dampened buyer sentiment somewhat. With long-term OD cover no longer an option, insurance costs for many vehicle buyers would seem optically lower, boosting sentiment.

Also, insurance players are likely to see increased opportunity in the renewals of OD cover. Players such as ICICI Lombard have increased their thrust on standalone OD covers (issued from September last year). However, there could be pricing competition in this segment going ahead.

All in all, the IRDAI’s move may have a neutral-to- marginally negative impact on earnings of insurance players, unless hike in TP rates happen.

For ICICI Lombard

In FY20, ICICI Lombard’s gross direct premium income (GDPI) reported a decline of 8.1 per cent YoY. But excluding crop (the company took a conscious call to exit crop business), GDPI grew by 10.5 per cent YoY, which was in line with industry growth.

While lower premium growth, lower renewals, no hike in TP rates and fall in interest rates can impact earnings in the near-term, ICICI Lombard’s long-term focus on profitable segments, healthy solvency ratio, market leadership and strong focus on technology, should help it tide over volatile times.

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