Motor claims hub: loss ratio, repudiation policy and surveyor capacity in one quarter
Bharat Motor Claims Hub settles own-damage claims for three states. In Q2 it received 2,640 claims, of which 431 were repudiated and 96 were still pending at the quarter end; the rest were paid at an average of ₹42,500. Salvage realised was ₹18,60,000 and reinsurance recoveries were ₹1,24,00,000. Earned premium for the quarter was ₹18.6 crore; commission was 11% of premium and management expenses were ₹1.94 crore. The hub has six sanctioned surveyors, each able to assess 44 claims a week over a 13-week quarter with 90% availability. The Regional Manager wants the pending queue cleared to nil in Q3 and the repudiation rate cut from 16% to 10%, arguing that this will improve the loss ratio. The Compliance Officer has separately flagged that the 431 repudiations were issued without a second-level review, and the regulator's inspection is due in eight weeks.
1. Compute the gross and net loss ratio and the combined ratio for Q2, and state what the numbers tell the Regional Manager.
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Step 1 - claims paid. Settled claims = 2,640 − 431 − 96 = 2,113. Paid amount = 2,113 × ₹42,500 = ₹8,98,02,500 (₹8.98 crore).
Step 2 - gross loss ratio. ₹8.98 crore ÷ ₹18.60 crore = 48.3%.
Step 3 - net loss ratio. Deduct salvage ₹0.186 crore and reinsurance recoveries ₹1.24 crore: ₹8.98 − ₹0.186 − ₹1.24 = ₹7.554 crore. ₹7.554 ÷ ₹18.60 = 40.6%. The recoveries are doing real work - nearly eight points of loss ratio.
Step 4 - expense ratio. Commission 11.0% plus management ₹1.94 crore ÷ ₹18.60 crore = 10.43%, so 21.43%.
Step 5 - combined ratio. 48.3 + 21.4 = 69.7% gross; 40.6 + 21.4 = 62.0% net. Every ₹100 of premium leaves roughly ₹30 of underwriting margin, comfortably better than break-even.
What it means. The book is profitable, so the discussion should not be framed as a rescue. Two caveats: the 96 pending claims are an unquantified liability that flatters the ratio, and the ratio is struck before the ₹1.24 crore recovery is confirmed. The hub's real problem is process - an unreviewed repudiation block and a backlog - not pricing.
2. Evaluate the Regional Manager's claim that cutting repudiations from 16% to 10% 'will improve the loss ratio', using numbers.
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The arithmetic says the opposite. The current repudiation rate is 431 ÷ 2,640 = 16.3%. Cutting it to 10% means paying roughly 6.3% of 2,640 ≈ 166 claims that would otherwise have been rejected. At the stated ₹51,000 average value of a repudiated claim, the extra cost is about ₹84.7 lakh, or 0.847 crore.
Effect on the ratio: 0.847 ÷ 18.60 = +4.6 percentage points, taking gross loss ratio from 48.3% to about 52.9%. The combined ratio moves from 69.7% to roughly 74.3%. The book stays profitable, but the Manager's direction of travel is wrong - every honest repudiation converted into a payment worsens the loss ratio.
Where his instinct is right. A 16.3% repudiation rate in own-damage is high, and an unreviewed block of 431 rejections is a conduct risk, not just a claims risk. If a material share were wrongly rejected, the eventual cost is worse than the loss ratio: ombudsman awards with interest, a conduct observation in the inspection report due in eight weeks, and reputational damage with the dealers and brokers who send the business.
Correct framing. The target should be 'zero wrongful repudiations', not '10%'. The 4.6-point cost is the price of correctness, and a second-level review may well find that most of the 431 were sound - in which case the ratio need not move at all.
3. Test whether the hub has the surveyor capacity to clear the 96 pending claims, re-review all 431 repudiations and absorb Q3 intake at Q2 levels.
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Capacity first. Six surveyors × 44 assessments × 13 weeks × 0.90 availability = 3,088.8 assessments per quarter.
Utilisation. Q2 intake of 2,640 against 3,088.8 = 85.5%. Spare capacity is only 448.8 assessments - about 17% of a quarter, or roughly nine working days of slack.
Demand in Q3. 2,640 new claims + 96 backlog + 431 second-level reviews = 3,167 assessments, which exceeds capacity by about 78. The plan does not fit as stated.
Options, in order of preference. (1) A second-level review of a repudiation is a desk review of the file, not a physical survey; if the review is done by two senior officers rather than the field surveyors, the 431 disappears from the capacity equation and demand falls to 2,736 - feasible, with 353 assessments of slack (11%). (2) If reviews must be field visits, re-inspect only the high-value and disputed files, say the top 150 by claim amount, which brings demand to 2,886 and fits. (3) Approve overtime or one temporary surveyor for the quarter - 78 assessments is under two weeks of one surveyor's output, the cheapest fix.
Conclusion. Capacity is adequate only if the review is designed as a desk exercise. The Manager should not commit to both a nil queue and a full field re-review with six surveyors and no overtime.