When people buy insurance for their private cars, most are unaware of the break-up of the cost. A motor insurance policy has two main components—third-party liability and own damage. In India, it is mandatory for all registered motor vehicles to have insurance for third-party liability. The premium for this is fixed by the insurance regulator and is announced every year. Premium paid towards this only covers liability from damage caused to a third party, including injury, death of an individual or damage to property in case of an accident.
The own-damage part of motor insurance is optional and it covers damage to the insured vehicle in case of an accident, and theft. Insurers can price the premium for this as they see fit, although there are guidelines.
“Insurance zones are created by insurers according to a vehicle’s vulnerability to damage or loss. Due to higher rates of vandalism, theft and accidents, urban drivers pay more for car insurance than those in small towns or rural areas. This zonal bifurcation generally comprises metro cities and rest of India,” said Rakesh Jain, chief executive officer, Reliance General Insurance.
A recent study by insurance web-aggregator Policybazaar shows how users in different states behave when it comes to own-damage premiums. The study was conducted on 3,00,000 policies sold through the platform in 2015-16 and 2016-17. While there is a marked difference in the data from states, we tried to see if insurance companies take note of this difference to price own-damage premiums.
Track record
Nine states were part of the study (they make up about 80% of the platform’s business)—Andhra Pradesh, Delhi, Gujarat, Haryana, Karnataka, Maharashtra, Rajasthan, Tamil Nadu and Uttar Pradesh. Of these, Karnataka and Andhra Pradesh appear to be the most profitable for insurers as they have the lowest loss ratio (59%); and Haryana is the least profitable with the highest loss ratio (84%). Loss ratio is the percentage of total premium collected that goes out in claims. So, lower the loss ratio, higher the profitability. When loss ratio is high, insurers increase the premium to cut losses.
Patterns were observed for 16 cities. While cities in the ‘profitable’ states showed good performance, there were outliers. Mumbai had the lowest loss ratio at 48%, while Chandigarh was the highest at 110%. “Traffic in a city like Mumbai is a major factor as that impacts the top speed a vehicle can achieve. That (slow speed) reduces the severity of claims and the loss ratio. Also, there are certain cities where fraudulent claims are high. Theft numbers also play a role. If public transport is good in a city, then the use of the vehicle and related risk to the insurer also goes down,” said Animesh Das, head, product strategy, Acko General Insurance.
Change in premiums
If there is a clear difference between how drivers in different cities and states drive, then do insurers take this behaviour into account when deciding premiums? Yes and no.
Here’s an example of mixed pricing. We looked at the own-damage premium for a popular hatchback from a public sector and a private sector insurer. In both cases, premium was the same for Karnataka and Tamil Nadu, even though loss ratio is higher in Tamil Nadu. And for Haryana, the public sector’s premium was in fact lower. (Renewal premium considered for Hyundai i10 Magna, petrol, bought in 2014 and policy expiring on 31 March 2018. No-claim bonus assumed at 45%.)
“The experience in Karnataka and Tamil Nadu are similar, so the pricing is in line. We must be having high losses in Haryana so the pricing is higher. Even within a single state, it is possible that two insurers have different experiences,” said S. Thirunavukkarasu, country head, underwriting and claims (motor), Royal Sundaram General Insurance Co. Ltd. He added that all insurers use their own data and experience to price premiums. “The market has still not evolved a common theory. ‘Karnataka is good’ and ‘Haryana is not good’ may not be true in every case. Even for a single insurer, one portion of motor insurance may be good in one place but the other may not be,” he said.
This may change in future. Just the way banks and e-commerce companies have evolved to an extent where they blacklist particular pincodes for certain services, insurance too may be priced similarly, said Das. Even within a geographical area, factors such as population density, vehicle density, road infrastructure, traffic conditions and behaviour of service centres are expected to play a role.
“With the advent of various techniques and statistical models, smallest of fractions can be priced as per the risk perspective of the geography,” said Jain. In developed markets, 85-90 data points on a policyholder are collected to arrive at pricing. In India, only 5-6 data points are collected, said Thirunavukkarasu. “It needs to become more granular. That is how matured markets operate: right risk, right pricing. The market is expecting these changes; it should start happening in the next 2 years,” he added.
Use of telematics to gather more data on user behaviour is being debated, but a more nuanced pricing of motor insurance is yet to happen. Till then, it is almost one size fits all.