Auto companies saw a drop in sales due to liquidity crunch and rise in price of vehicles.
The dip in the sales of motor vehicles in FY19 is expected to have a direct impact on the fourth quarter profits of general insurers. Motor which constitutes almost 45 percent of the general insurers’ books has been loss-making on one hand, while premium increases have been inadequate.
According to Society of Indian Automobile Manufacturers (SIAM), the passenger vehicle sales in India rose just 2.7 per cent in 2018-19 due to weak customer sentiment. This was caused by a series of factors including liquidity crunch and rise in prices of vehicles among others.
With respect to the general insurance sector, ICICI Lombard General Insurance, New India Assurance and reinsurer General Insurance Corporation of India (GIC Re) are listed on the exchanges. ICICI Lombard will come out with its financial results on April 18.
State-owned general insurer New India Assurance posted a net loss of Rs 113.52 crore in the December quarter on account of a three-fold jump in underwriting losses. The insurer had posted profits of Rs 617.29 crore in the same quarter last fiscal.
Similarly, while ICICI Lombard General Insurance posted a 3.2 percent year-on-year (YoY) growth in the December quarter (Q3) net profit, it saw an underwriting loss in segments like motor, crop insurance, corporate health and health government business.
While the underwriting losses in motor insurance, corporate health and health government businesses decreased, the crop insurance segment posted an underwriting loss of Rs 39.70 crore for Q3FY19 versus underwriting profit of Rs 6.29 crore in the year-ago period.
Ironically, a rise in insurance prices was also a factor that led to a rise in the vehicle prices.
In August 2018, the Supreme Court mandated the sale of third party insurance cover of three years for new cars and five years for two-wheelers from September 1 onwards. This led to a rise in premiums by 2.86-3.08 times and 2.45-5.61 times for new cars and bikes purchased after this date respectively.
Third party motor insurance products are mandatory for all vehicles running on Indian roads. The pricing of these products is decided by the insurance regulator IRDAI, taking into account the type of vehicle, past claims data and engine capacity.
Third party insurance protects the vehicle owner from financial liabilities incurred due to accidents. If a pedestrian or another vehicle's passenger gets injured or dies during a mishap by vehicle X, the motor third party cover of the vehicle X owner will pay for the damages.
Since the loss ratios are in the range of 120-130 percent in the motor third party segment, there is a rise in premiums every year. Loss ratios mean that, for every Rs 100 collected as premium, Rs 120-130 is paid out as claims.However, in FY20, IRDAI decided to keep motor insurance third party premium rates on hold. While this will impact general insurers' books, this could boost auto sales.