If you thought that India's general insurance companies settle road accident claims only if the victim or vehicle involved is insured, then change your views! What's strange is that these underwriters are made to pay irrespective of whether the vehicle involved in the accident is insured or not!

As the Motor Vehicles Act states that all vehicles should have at least a third party insurance policy, courts award compensation on the premise that the concerned vehicle is deemed to have been insured by any one of the four public sector general insurers!

All that an accident victim has to do is send a legal notice to any of the insurance offices located near the accident site. The onus shifts to the insurance company to prove that the hit and run vehicle is not insured by it.

Given the size of India's vehicle population and the poor investment in information technology by the underwriters, they find it almost impossible to establish that a vehicle involved with an accident is not insured with any one of its offices in the country! Naturally, courts decide the cases in favour of claimants.

Such claims, where the details of the vehicle, insurance details, etc., are not available are called 'orphan claims'.

Better provision
Till last year, motor third party claims lacking insurance particulars were recognised and provided for only on identification and confirmation of insurance coverage by the companies.

It is learnt that the Insurance Regulatory Authority wanted to put a stop to this practice. So, from last year, underwriters are now providing in their accounts a sum equivalent to a third of the total estimated liability on account of such unidentified claims. In the case of United India, Rs.49.02 crore were provided for 'orphan claims' last year.

In addition, a further provision for outstanding liability for claims incurred but not reported has been made by United India for claims incurred but not reported, at 10.5 per cent in the case of motor and engineering business and 5.5 per cent in the case of others on outstanding liability for reported claims.

Meanwhile the general insurance companies' accounting procedures are in for an overhaul. It is learnt that the IRA has asked the Institute of Chartered Accountants of India to study the current industry accounting practices and suggest measures that would bring in more transparency.

Investment income accounting
The IRA had earlier asked the underwriters to account premium received on long term policies in a rational manner and not to book the amount in the year of receipt. Another important area that is being looked into, which would have far reaching implications, is the accounting of investment income.

For the uninitiated, the annual accounts of insurance companies are divided into three parts -- revenue account (prepared business class-wise), profit and loss account, proft and loss appropriation account and balance sheet.

The revenue account shows the underwriting results, taking into account the premiums received and claims paid. Based on the result, the premium is fixed. So the higher the underwriting loss, the higher will the premium be.

Currently the entire investment income is shown on the income side of the profit and loss account. The question being asked is: why not take a part of the investment income to the revenue account, since the premium received is also invested? If this is done, the underwriting loss would get reduced or profit go up. These would be beneficial for policyholders.

Remember, premium rates are arrived at on the basis of actual underwriting experience. So insurance companies would clamour for hike in premium rates if the underwriting results in loss. Says an industry official, "Globally all underwriters follow a uniform accounting practice. Any deviation by Indian insurers will impact our reinsurance rates."

Another official says, "Indian underwriters would get better quotes from their reinsurers by this move. If some percentage of investment income is shown in the revenue account, the underwriting loss would get reduced, or profit would go up. Either way, the reinsurers would be forced to reduce their rates."