Suspicious Third-party Motor Claims Under Irda Scrutiny

A fortnight after it dismantled the third-party motor pool, the insurance regulator is investigating whether companies were faking claims to take money out of the common fund.

According to two persons with direct knowledge of the matter, the Insurance Regulatory and Development Authority (Irda) is looking into fake claims, overstatement of claims and cases where claims were settled for much higher amounts outside the Motor Accident Claims Tribunal in connivance with customers.

However, Irda chairman J.
Hari Narayan denied any investigations were on.

The third-party motor pool was set up four years ago and was a common fund into which every general insurer had to mandatorily contribute the premium collected on such insurance policies. All third- party claims on general insurers were paid out of this pool.
Two weeks ago, Irda shut down the pool citing capital depletion due to inefficiencies in settling claims and replaced it with a “declining pool“, giving insurers the choice of either ceding third-party cover to the pool or retaining it.

An internal committee has been set up with three Irda and four industry members for the investigation, the first of its kind. Irda is also appointing an auditor to scan the books of accounts of seven companies for various fraudulent claims they allegedly filed towards the third-party pool.

The Irda officials in the committee are M. Ramaprasad, member (non-life), besides Randip Singh Jagpal and J. Meena Kumari, joint directors.
The other members are the chief executives of the Oriental Insurance Co. Ltd, United India Insurance Co. Ltd, HDFC Ergo General Insurance Co.
Ltd and Bajaj Allianz General Insurance Co. Ltd.

“We are in talks with a couple of audit firms and will ap- point one by the end of this month to go through the books of accounts of these companies, which we suspect have perpetrated this fraud and phoned off money out of the motor pool,“ a senior Irda official said on condition of anonymity as the details of the investigation are not public yet.

According to the official, the accounts for the last four-five years will be evaluated to determine whether these companies have been following any fraudulent practices and booking fake losses under the pool.
He refused to divulge the names of the companies as the charges against them have not been established.

The insurance regulator will look into instances of three different types of frauds: a) Companies that booked claims that were not third-par
 claims to the pool and phoned out money, b) Firms that did not route claims through the tribunal and settled them out of court for much larger amounts than needed from the pool. This happens in cases where claim- ants do not agree to the claim amount decided by the tribunal and settle it out of court with the insurance firms, and, c) Fraud perpetrated by people who are not part of the management of the company by colluding with police officials, lawyers and customers for a higher claim amount than justified.

According to data available with Irda, the average claims ratio varied by as much as 100% across companies, reflecting huge inefficiencies in claims settlement by some of them.

“The claims in third-party motor insurance have galloped to 250-260% due to which the pool suffered huge losses,“ the first official mentioned above said. This means that for every `100 collected as premium on a policy, claims amount to `250. “The average claim incurred for the industry is `1.9 lakh per case in TP (third-party) motor, but companies whose claims are more than `3 lakh per case are adopting fraudulent ways, we suspect,“ the official said. According to him, companies that manage claims in an efficient manner have a lower claim amount of `1.1-1.2 lakh per case.

The committee and the auditors will look into how the companies routed the money out of the pool and how they booked these claims and man- aged them. “We need to know where this money went and we suspect these companies were booking other claims under the third-party pool and defrauding the entire industry,“ the second official said.

General insurance companies have been reeling under huge claim losses in the motor and health insurance businesses. Within motor insurance, third-party claims have a major share as against own damage claims. As of 31 March, the corpus of the third- party motor pool was more than `3,500 crore with loss provisioning as high as 153%. With the creation of a declining risk insurance pool, the regulator is hoping to bring in efficiency in claim management as losses will now be distributed among companies on a more equitable basis. In the earlier arrangement, the losses in the third-party motor pool were shared by firms on the basis of their total market share. As a result, even firms that did not have a big motor insurance portfolio had to bear losses on the basis of their overall market share. But in the declining pool mechanism, the losses will be shared based on their total market share as well as their market share in the motor insurance segment.

Hindustan Times, New Delhi, 04-01-2012