Third Party Motor Insurance Pool

Third party motor insurance pool came into existence on 1st April 2007, specifically for commercial vehicles. Under this pool, all insurers were required to cover the third party losses incurred by such vehicles and also cover the premium rates set up by the IRDAI. Let us understand more about this concept further in the article.

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What is Third Party Motor Insurance Pool?

A third party motor insurance pool was formed by the Insurance Regulatory and Development Authority of India (IRDAI). Under this pool, every insurance company that offers motor insurance came together to contribute to a pool of funds for third party liabilities incurred by commercial vehicle owners.

The premium collected under this pool was used for the purpose of reinsurance, which is basically done to cover up the insurance company's risk of providing different types of insurance.

The third-party insurance pool enabled insurance companies to provide adequate compensation for the losses suffered by third parties. Thus, this pool was created with the aim to provide backup for the losses suffered by third parties under commercial vehicle insurance.

With a third party insurance pool, the IRDAI also aimed to provide third party insurance to commercial vehicle owners at reasonable rates and to reduce the burden of the insurance company by distributing third party losses among all the insurers.

Reasons Behind Formation of Third Party Motor Insurance Pool

Here is why a third party insurance pool was created by the IRDAI:

  • Certain data showed that insurers in India could not deal with the increasing third party losses and therefore, this pool was created to divide such burden among all the insurers.
  • To cope with the increasing burden, the insurance companies started focussing more on selling other insurance-related products that were more profitable than third party liability motor insurance plans.
  • This situation worsened and impacted third parties badly, thus, leading to the formation of a third party insurance pool.

The Decline of the Third Party Motor Insurance Pool

The third party insurance pool was not very successful and thus, led to its decline in just a few years. It got cancelled by the authorities in the year 2012. The major reason behind the cancellation was the losses suffered by the insurance companies after bearing third party losses collectively. The insurance companies had to pay the excessive expenses out of their pockets, which ultimately put them under heavy financial strain.

Let us take this example for better understanding:

Suppose an insurance company Z contributes some amount to the third party insurance pool with a market share of 20% of the premium received and paid. Now suppose the insurance premium collected by the pool is Rs. 15 lakh but the claims incurred turned out to be Rs.20 lakh in a given year. Z with a 20% share in the pool will receive Rs. 3 lakh from the pool as premium but will have to pay Rs. 4 lakh as claim amount. As a result, the company will end up incurring a loss of Rs. 1 lakh.

Thus, the quantum of loss incurred by the insurer under a third party insurance pool is huge, leading them to pay this amount from their pocket. Even if the companies underwrite large insurance policies, they still have to bear such out-of-pocket losses.

To recover such losses incurred by insurance companies, the third party insurance pool was cancelled and a new type of insurance pool was proposed by the IRDAI. The latter was called a third-party motor insurance decline pool.

Formation of Third Party Decline Risk Pool

A third party decline risk pool was formed to offer support to the insurers so that they can successfully payout third party claims without incurring huge losses. Under this pool, the insurance company has the right to decline a third-party commercial vehicle insurance for a particular type of vehicle if it finds it too risky to underwrite. The declined vehicle insurance will, then, be settled by another insurer. For the rest of the vehicles, the insurer can settle the risks independently.

Under third party decline risk pool, the insurance companies were allowed to decline third party insurance based on certain parameters, such as the age, type of vehicle, and claim history. Some of them were also decided by the (GIC) General Insurance Corporation, which is in charge of the declined risk pool and reviews premiums and payouts of the pool.

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Wrapping Up!

To cover the losses under third party motor insurance, the third-party insurance pool was formed. However, the losses suffered by the insurers could not be effectively compensated resulting in the decline of this pool. Moreover, the introduction of a declined risk pool is also not proving profitable due to certain discrepancies, thus, leading to its slow dismantling.

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