Monday, August 10, 2015

Wrong No Claim Bonus needs to be checked

This article was first published in the IIB Bulletin, Vol 2, Issue 1, pp6-7

43% of the estimated approximately Rs5000 crores fraud in the General Insurance Industry in India, as per the India Forensic center research 2011, is accounted for by the Motor Insurance Business. Staged thefts, Overstating damages/claims, multiple claims for the same damage through multiple Insurance companies and the misuse of No Claim Bonus (NCB) are just a few examples of fraud in Motor Insurance.

If a policyholder does not make a claim during the previous policy year, a discount on the premium is given to reward the policyholder while renewing the policy. However, if a claim is made, the discount is not given. In such a scenario, the policyholder may go to another Insurance company and take a policy on the vehicle, without disclosing the previous claims.

In a Simulation exercise done using hypothetical data, done by the Insurance Premium Rating Bureau, Thailand, it was found that giving higher NCB can have a serious impact on the loss ratio of the companies. For example, in figure 1 below, 155,876 vehicles came up for renewal in Underwriting Year 2010. Out of these, 71,907 vehicles should not have got a NCB. However, only 19,514 were not given NCB. Rest of the 52,393 vehicles got NCB in the range of 20% to 50%.

Figure 1: Simulation of NCB 1st Year Renewal

Figure 2: Simulation of NCB 4th Year Renewal
These charts were first presented at the Insurance Information and Ratemaking Forum of Asia, 2015 in Kuala Lumpur, Malaysia on May 28, 2015 by Chutatong Charumilind and Konthorn Chainiwattana, Insurance Premium Rating Bureau, Thailand. Reprinted with permission.

Similarly, when these vehicles came up for renewals in subsequent underwriting years, some vehicles were always awarded NCB that they did not deserve. The resulting Loss Ratio for such vehicles, which were consistently awarded wrong NCB, was a whopping 164% to the Insurer.

Plugging in NCB leakage is hence extremely important for the Insurers.

Vehicle Claims History Search is a service provided by IIB to Insurers, which is aimed at removing the information asymmetry between the Insurer and the policyholder with respect to the previous claims. The use of this service would ensure that vehicles which have had claims in the past are not rewarded with No claims bonus. The Vehicle Claims History Search facility also brings in efficiency as the Insurers do not have to depend on the previous Insurers for verification of claims, it is a low cost option which can also be integrated to the policy management system of the Insurers through the web service provided by IIB.
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