Vehicle Recalls Impacts Motor Insurance Sector

Honda, the Japanese car manufacturer recently revealed that it is recalling about 2,338 units of its compact sedan Amaze, hatchback Brio, and the sports utility vehicle CR-V, which were manufactured during September 2011 - July 2014, in India to substitute a faulty part allied to airbags. Also, Nissan the Japanese auto major stated last week that it was recalling its Sedan Sunny and compact car Micra totaling to about 9000 units in India to change faulty airbags. Thus, with a spate of various other recalls, it has been the cause of concern for the non-life insurance sector.

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The General Insurance industry provides insurance for product recalls mainly by the automobile industry. It largely covers product recall expenditures, including shipping costs, advertising, and even the legal liability. The premium for this specific cover greatly depends on the vehicle’s size, segment and brand. Product recalls occur, if there is a defect in its operation or design, which could cause danger to the owner’s. Furthermore, the recalls can be performance related, relating to the acceleration, fuel efficiency or the braking system. This might also impact the guarantee provided on vehicle.

If in case an auto company has taken cover against product recalls, the insurance firm would pay all the associated costs to recall. If in case, there are a colossal number of vehicles which are recalled and that too at regular intervals, the motor insurance firm suffers a huge loss owing to the regular payments of associated claims.

India sells about 3.1 million automobiles every year, and stands among top six in the automotive world market, but India does not have a recall policy. These recalls are voluntary as per the code drawn by the SIAM. Nearly, more than 700,000 cars have been recalled by the Maruti Suzuki, Toyota, Ford, Mahindra & Mahindra, Generals Motors and Nissan in India over the past two years.

Some of the non-life players told that, as the country doesn’t have any sort of recall policy, it becomes quite difficult in order to decide the price. It’s quite risky as there is not set codes to follow. Since the number of recalls is on the increasing levels we need to look at the increasing premiums, as told by chief executive officer of the private insurance company.

According to the studies and the estimation, the overall ratio of the motor insurance company may touch up to 200% by the end of the next financial year. This overall ratio is the sum of the incurred losses and the operating expenses and is measured as a percentage of the earned premium. This ratio is considered as the measurement of the profitability. This combined ratio below 100% indicates that the insurer is completely under profit.

The general insurance companies have incurred a total claim of INR 17,589 crore during 2012-13 as per the data provided by the reliable official sources. Hence, the overall premium segment is INR 28,460 crore, which is quite profitable from the previous years.

(Source: This article has been adapted from the article "Vehicle recalls hit motor insurance" that appeared on October 29, 2014 in business-standard.com.)