Supreme Court rulings set to raise insurers' third-party liability

Mumbai: General insurers may have to increase reserves for motor third-party claims as a series of Supreme Court rulings raise the compensation payable to accident victims, putting further pressure on insurers' profitability.

The Supreme Court's June ruling in the Shishu Pal case, which fixed a notional monthly income of ₹30,000 for homemakers while calculating compensation in motor accident claims, has implications for insurers. They estimate the ruling could increase motor third-party claim outgo by 3-4% initially, with the impact potentially rising to 10-12% as courts across the country adopt the interpretation more widely over the next 12-18 months.

"This is a clear impact because of the higher outflow. The provisioning requirement is going to go up," a senior insurance executive said, adding that the impact would ultimately be seen in insurers' profitability.


A significant number of women victims are pillion riders in two-wheelers, and estimates showed that a majority of them were homemakers. The impact will vary by insurer depending on the size and composition of their motor third-party portfolio. ICICI Lombard General Insurance, for instance, made an additional ₹165 crore provision towards motor third-party claims in the June quarter following the ruling. The additional provisioning contributed to a 2.8% increase in its combined ratio taking it to 107.2%.

Another ruling of the Supreme Court on occupant and pillion-rider coverage under comprehensive or package motor policies is also seen to have an impact. The court has directed the Insurance Regulatory and Development Authority of India (IRDAI) to standardise policy wording for such covers, while allowing insurers to determine the coverage and pricing.

Policy Clarity

The court has also sought clearer segregation of motor insurance covers, which could result in a more defined structure comprising basic third-party liability, occupant or personal accident cover and own-damage protection. The move is aimed at removing ambiguity over whether occupants of private vehicles are covered under existing policies.

The latest rulings come at a time when motor third-party insurance remains a difficult business for general insurers.

Third-party premiums have risen by less than 2% annually on a compound basis over the past several years, even as claim costs have continued to rise.

Insurers are also pushing for stronger enforcement of mandatory motor insurance.