Higher Claims and Reinsurance on Nano - Review

Higher loss claims and the possibility of non-proportionate reinsurance being factored into insurance policies taken for the Tata Nano, cannot be ruled out. This may necessitate the five insurance companies insuring the Nano to review the annual premiums that are currently expected to be in the range of 2.5 to 3 per cent of the insured declared value (IDC) of the model when it rolls out from the factory.

First time drivers graduating from two-wheelers, a larger expected commercial usage of the vehicle due to its low-ticket value, may increase the accident frequency. This may raise the possibility of higher loss claims accruing to insurers and consequent higher overhead expenses due to the low price of the Nano.

“Accident impact, availability of spare parts to replace those damaged, driver’s profile, the acquisition cost of a customer and the administrative cost of the insurer will vary from one insurance company to another.

If the combined ratio including claims and expenses of a company is about 95 per cent, then an insurer can make a margin or remain cost neutral. Otherwise he will suffer a loss,” Director of KPMG India, Shashwat Sharma told Express.

“The Nano will be used as a family car and not for commercial purposes. Hence, its risk profile will be attractive to insurance companies,” clarified Head-Motor Insurance, ICICI Lombard General Insurance Company, Easwaranatarajan N.

ICICI Lombard is one of the insurers for the Nano.

While ruling out the possibility of a proportionate reinsurance due to the low-ticket size of the car, Sharma felt that nonproportionate reinsurance needed to be factored into the insurance policy. This would raise the premium cost to about 3.5 per cent of the IDV of the car.

But since most of the motor vehicles on the roads already carried insurance policies inclusive of non-proportionate reinsurance, oblivious to the policyholder, this was on expected lines.

A non-proportionate reinsurance cover encompasses all catastrophic events such as a flood, riots or an earthquake with the second insurer sharing the risk in case of a mass damage, to about 200 vehicles for instance, insured by the original insurer. In reinsurance, an insurance company passes part of its risk to another insurer if it is unable to absorb the entire risk itself.

But industry experts differed stating that reinsurance was expensive and not necessary for the Nano. Others felt that the insurance sector survived on the likelihood of unforeseen events occurring.

While not ruling out the possibility of reinsurance in case of Nano, Director, Crisil Ratings, Pawan Agrawal said: “It is primarily large industrial installations with huge risk exposures which take reinsurance cover. Even in the automotive sector, for a higher priced model like the Mercedes Benz it is viable, but Nano carries no large risk. Moreover, all the owners are not going to meet with an accident together.”

source:Expressbuzz.com