CV operators will continue to abstain from insuring their vehicles promptly if they don’t see it as a value proposition

Story by:

Ashish Bhatia

Motor insurance is mandatory. Spending long hours on the road ferrying goods and people, commercial vehicles are perhaps the most in need of a robust insurance cover. To them, the need is to pitch an insurance policy that has a value proposition. A lack of a value proposition is said to be one of the key reasons why many CV operators continue to abstain from insuring their vehicles promptly. This, despite the fact that third party risks are the highest in this segment. Pointing at the loss incurred by the insurance sector, the Insurance Regulatory and Development Authority of India (IRDAI) is known to pitch for a 25 per cent to 30 per cent rise in insurance premium for commercial vehicles. Despite the hike, the need to review the premium is felt every year. No wonder the IRDAI is claimed to have requested a hike to the tune of 80 per cent instead of the current increase of around 25 to 30 per cent. If the hike in premium passes through, the transport industry, according to Praveen Somani, Managing Director, Inland World Logistics, would be left with no choice but to comply. “It will increase the Total Cost of Operation,” he added. If the industry sources are to be believed, the hike is a result of the insurer’s portfolios bleeding for some time now. A major reason for the hike in premiums by insurers, said Saroj Satapathy, CEO, Ideal Insurance Brokers Pvt. Ltd, was their ratio of third party losses to their average loss ratio. A figure which he claimed was 150 per cent. Claiming the Own Damage (OD) to touch 100 per cent, Satapathy estimated the combined ratio of Motor Insurance losses to hover at an estimated figure of more than 100 per cent. “There has been a conscious attempt to contain the loss ratio in third party claims”, averred Satapathy, “by increasing the rate of premium every year for the last three years.”

Motor insurance and new breed of CVs

The advent of a breed of commercial vehicles including app. triggered motorbikes, erickshaws and others is certain to have an effect on motor insurance as a offering. The amendments proposed in the Road Transport & Safety Bill and Motor Insurance Act 1988 is also certain to have an effect. Apart from these two, finance minister Arun Jaitley inviting private operators (entrepreneurs) to ply buses on roads in a bid to open up the sector would have an effect on motor insurance. On a different plain, accidents in India are on the rise. The involvement of commercial vehicles in accidents is more in number than those involving private vehicles. In the wake of these developments it is necessary to relook at the role of almost element including insurance. Expressed Somani that the government should realise that insurance in CVs can be sold only if it is transformed into a value proposition. “It would help if schemes are formulated at mutually acceptable terms to all the stakeholders. Covering up for past losses of insurers should not be the sole aim,” he averred. Questions sent to IRDAI were not responded to until the time of going to press.

Spurt in requirement

With the cost of operations taking precedence in the CV industry, it is necessary to educate the industry to avail of the right insurance coverage. “There has been a spurt in the requirement of insurance in this segment. Most however avoid buying it after the vehicles turns five. In 2012-13 there were only 65 Goods Carrying Vehicles (GCVs) insured for every 100 GCVs registered, ” mentioned Satapathy. The number of commercial vehicles in India is rising. Their diversity is also growing. More SCVs are visible on the road today. At the other end, more higher tonnage vehicles are visible on the road. A distinct change is in motion in the CV industry. The effect of this on the insurance sector is likely to be to translate into a demand for more diversified insurance cover products offering. Drawing attention to the high risk associated with the operation of a commercial vehicle, Somani expressed that fleet operators should look at specific insurance products to choose what suit their needs the most. They should look at products that are most advantageous to them.. “Fleet operators should look at not just third party liability risk, but also the probability of damage to self, which is likely to be the highest when it comes to CVs,” he opined. “

Need for comprehensive insurance

As fleet sizes increase, a demand for comprehensive insurance insurance policies is growing. Claimed Somani, that fleet owners looking at larger fleets are starting to feel the need for comprehensive insurance. He cited, “Most part of the fleet at IWL is covered under comprehensive insurance.” Added Satapathy, that insurance in CVs is mainly of three major types. One is the comprehensive insurance policy, which is known to covers loss or damage to the vehicle. The second type covers third party property damage includes injury or death to third party. There is the mandatory requirement of the third party policy for all vehicles accessing public roads. The third type covers fire and theft. Out of the three, Satapathy advocated the need to avail of the minimum, third party insurance without fail. He opined that public and private sector insurers today are open to offering unique add ons for commercial vehicles. They are also open to offering substantial discounts in case of damage by self on a case-to-case basis. He quipped, profitability margin often plays a major role in how a CV insurance policy is formulated. Blaming the high frequency and severity of claims on the rise in premium of third party liability, Somani claimed that such premiums were amounting to two to three per cent of the TCO. Satapathy opined that it was not easy to arrive at the proportion of premiums in comparison to the TCO. He added, “It was purely a factor of several parameters that one needed to consider before arriving at any conclusion. These parameters include the showroom price of the vehicle at the commencement of the insurance period; make of the vehicle; its cubic capacity; GVW; payload capacity, and the place of registration. In case of a passenger carrier, Satapathy mentioned that the number of passengers a vehicle is authorised to carry is taken into consideration. He added, “The new breed of vehicles need to avail of add on covers to take care of depreciation. They have Indian motor tariff (IMT)-23 cover for mudguard, bonnet and lamps. They also have IMT-1 to extend the geographical area of the motor policy and IMT-29, which covers the ‘helper’ and ‘coolie’ to name a few.”

Insurance premium Vs TCO

The TCO for the same model of truck can differ depending on the nature of its use, its uptime, maintenance and various other factors. An insurance premium makes an important of the TCO. It is therefore quiet difficult to simply calculate or arrive at a proportion of premium in comparison to the TCO indeed. A Tata truck according Satapathy costing Rs.19,89,000 would have a premium payable of about Rs.32,975. The premium in this case is at less than two per cent, and lower than the figure (2 to 3 per cent ) claimed by Somani. Claimed an expert that lower tonnage vehicles ply around more if one has to go by the number of trips a truck may execute. Said Satapathy, that the frequency of claim in case of lower tonnage vehicles would thus be higher. However it is the higher tonnage vehicles that have been attracting more severe claims. One of the important deciding factors is Gross Vehicle Weight (GVW). Vehicle with higher GVW is said to be more prone to accidents. As a result, the claim ratio for these is also known to be higher. A primary reason perhaps for higher costs in case of higher capacity goods carriers. Mentioned Satapathy that the reason for hike in premium has to do with the rising higher tonnage vehicles. He pointed to the last three years. Third party premiums have increased, of vehicles exceeding 12-tonnes during the last three years.

Satapathy drew attention to a statistics, which reported zero per cent hike in insurance in case the CVs weighing more than 7.5-tonne over the last one year. Categorising the premium hike based on the vehicle’s tonnage, Satapathy claimed that business in both, goods and passenger carriers, was hit.

Draft proposals

Apart from rising premiums and a change in insurance products, likely to affect the CV insurance industry are the draft draft proposals in the pipeline. One such draft proposal is from the Ministry of Road, Transport and Highways (MoRTH). As per a recent report from the Indian Foundation of Transport Research & Training (IFTRT), the draft notification proposes relaxation of license norms for commercial vehicle drivers. Industry experts however are concerned. They feel that this could severely affect driver quality and compromise on road safety. With the CV industry facing a severe shortage of good drivers, Satapathy stated that easing licensing norms could result in lower grade drivers and commercial vehicles coming on the roads. Another proposal looks at relaxing the two driver rule for heavy-duty trucks operating with a single all-India national permit. SP Singh, Senior Fellow at IFTRT is known to have expressed that fleet operators plying on 300 km to 500 km route are not very happy with this development. He is claimed to have opined that it may not work well since operators end up making 10 to 12 trips per month, effectively covering more distance than the long haulage trucks. With just one driver and chances of fatigue creeping in, Singh is known to have stated. Industry experts also are of the opinion that the two driver rule should not be relaxed as this may compromise road safety. Speaking about the implementation of the Road Transport & Safety Bill and Motor Insurance Act 1988, a proposal which aims to put a cap on liability, geography and the time period within which a claim can be filed, Somani expressed concern. He said that it could translate into a huge financial burden for the fleet operators. A few positives, said Satapathy, are a lot of regulation change it would bring. Stressing upon the Motor Vehicle Act 1988 having unlimited third-party liability, Satapathy said, the main objective would be to establish a perfect balance between liability and unlimited liability, According to Satapathy, it would help the insurance company and general public to avoid long drawn legal battles. It would also help contain the often spurious claims and on occasion the unreasonable claim amounts awarded by courts in the country.

Claims and the vehicle structure

Closely linked to the way in which insurance claims are processed is the structural frame of a commercial vehicle among other bits. Commercial Vehicles world over are known to benefit from the use of composite materials. With demand for higher fuel efficiency, a good option for OEMs is to reduce weight by using plastic composites. Plastic composites have failed to find favour with operators because their claims are rejected by insurance companies. Satapathy, rather than to speak about the use of plastic composites in CVs chose to speak about depreciation. “The depreciation percentage is quite high and may result in higher upfront loss in case of an accident,” he averred. He also stressed upon the growing trend of insurance companies extending zero depreciation cover to commercial vehicles. Necessary is the need need to settle claims efficiently. Globally it is the driver’s driving history that determines the pricing, discount and penalty on insurance claims. In India, claims are settled based upon the owner’s claim history and not that of the driver. This could well be a big lacunae.