Recently a few insurers - including ICICI Lombard and New India Assurance - have launched long-term two-wheeler insurance which covers your bike for up to three years as against the regular cover of only one year. The IRDAI has permitted introduction of this long-term cover to combat non-renewal of two-wheeler insurance or in other words, to encourage two-wheeler owners to buy the mandatory third-party cover. However, buying a longer-tenure bike policy is not mandatory.
“While the number of two wheelers is growing exponentially every year, the number of vehicles falling out of the insurance net is also very high. More than 2/3rd of old two wheelers go uninsured. Keeping this in view, having a long-term insurance option for this segment becomes critical so that the maximum number of vehicles are covered under insurance,” says Amitabh Jain, head, customer service, motor, ICICI Lombard.
Whatever be the case, long-term bike insurance is worth considering as it offers certain advantages such as some discounts in premium and insulation from the yearly increases in third party (TP) premium. Let us examine the advantages and disadvantages of taking such a policy.
Long-term two-wheeler insurance saves one from the hassles of renewing the policy every year. According to experts, it is cumbersome to keep track of annual renewal dates of policies, particularly when someone owns more than one policy. Further, even if someone remembers the renewal date, he/she might fail to renew the policy owing to lack of time or some other reason. “However, these things can be taken care of by opting for long-term two-wheeler insurance as it provides a convenient way for the customers to keep their two wheelers insured without facing the hassle of annual renewals,” says Jain.
Avoid non-renewal related risks
The insured is also exposed to certain risks in case of non-renewal of an insurance policy or till the time the policy is not renewed. For instance, if the vehicle meets with an accident or is stolen when the policy is not in force, then the vehicle owner would have to bear the entire financial loss himself/herself. However, this can be easily avoided for three years by buying a long-term two-wheeler insurance policy.
Avoid problems of renewing a lapsed policy
In case the policy has lapsed, some insurance companies, though not all, insist on getting the vehicle inspected to determine its condition prior to renewing the policy. Buying a long-term two wheeler policy helps avoid such a situation because the policy does not have to be renewed for two or three years depending on the tenure of the policy.
Discount on own damage premium
Today, insurance companies are willing to offer discounts on the own damage part of the policy premium for long term insurance policies. Long term policies help insurers cut administrative and policy-issuing costs and these savings are in turn, passed on to the customer in the form of a discount. However, not all insurance companies offer such discounts. As the premium rates for general insurance are determined by the policy regulator, the premium rate per annum for yearly and long term policies is the same. However, customers can request the insurance company, broking firm or agent for a discount and chances of getting deeper discounts on long term policies vis-a-vis one-year policies are high, says Adhil Shetty, founder & CEO of BankBazaar.com. However, clearly, such discounts would vary from company to company.
For example, ICICI Lombard also gives discounts on OD premium to first time buyers of its long term two wheeler insurance policies. However, the amount of discount is not fixed but varies from policy to policy depending on the manufacturer of the two wheeler, the model, RTO where the vehicle is registered etc, says Sanjeev S. Head – E-channel, Bancassurance and Marketing, ICICI Lombard.
Premium rate frozen for three years
Long-term insurance also saves one from the annual hike in third party premium rates. Third party premium rates are fixed by the insurance regulator which normally hikes these tariffs by 10-15% per annum on an average. Moreover, based on their claims experience, policy coverage and other factors, insurance companies may also increase the OD (own damage) premium from time to time. “But one remains insulated from any such hike during the policy term if one has opted for a long-term cover,” says Jain.
Related: Why you should get your two-wheeler insured if you haven’t already
Also, in case of some insurers, long-term two-wheeler policies score over the existing one-year policies in case of NCB (no claim bonus) also. According to experts, the structure of the NCB slabs in case of renewal of a long-term policy is different from the existing NCB slabs for one-year policies.
For example, in case of ICICI Lombard, a person buying a long term two wheeler insurance policy from the company for the first time will get whatever NCB discount he has earned on his previous policy. This means that if the person has earned say 20% NCB over the previous claim free year on his/her previous policy with any insurer, then he/she would get a NCB of the same amount on the purchase of the first long term policy from ICICI Lombard.
This NCB discount would be in addition to any upfront discount that the buyer is able to obtain on the purchase of his/her first long term policy from ICICI Lombard.
For ICICI Lombard the NCB structure on renewal of a long term policy works as follows:
In case of the ICICI Lombard’s NCB discount structure, long term policies score over single year policies. While in single year policies one would get only 35% NCB at the end of three consecutive claim free years, in case of a totally claim-free 3 year long term policy one would be entitled to 40% NCB. Refer Table.
Unlike in single year policies, if a claim is made during a long term policy of ICICI Lombard you do not lose your NCB totally, subject to certain limits.
What happens if a long term policy terminates or is cancelled?
“In case of both single year and long term policies the claim amount would be payable as per the policy coverage any time during the policy tenure and the policy will not be terminated post payment of the claim amount. Termination will be only in case of total loss/theft”, says Amitabh Jain.
“However, unlike single year policies, in case of long term policies certain percentage of the premium for the full unexpired years would be refunded in case of total loss or theft”, he says.
If the long term policy gets terminated for any reason e.g. say in case of total loss claim in first year of 2 year policy then the insured gets paid as per rules, as well as refund of a certain percentage of premium paid. If a claim is more than 70% of the IDV then it is called ‘constructive total loss’ in which case the full IDV is paid and the policy terminates.
However, if a person cancels a policy, he will receive refund of a part of the premium in both types of policies (single year and long term), adds Jain.
However, if you decide to terminate the policy on your own before it has run its full tenure then in case of one year and two year policies the premium refunded is slightly less than the proportionate amount of premium for the balance of the tenure, as per the ICICI Lombard policy wordings. In case of a three year policy it is only marginally less than the proportionate premium for the remaining tenure. This extra deduction is a result of the administrative cost to the company for the paperwork involved due to cancellation etc. In case, a one year policy is cancelled by the policy holder then premium is charged at ‘short policy rates’ for the tenure it has run and the balance left (calculated on pro-rata basis) is returned subject to retention of a minimum amount of Rs 100, as per the policy wordings.
Sanjeev S., Head – E-channel, Bancassurance and Marketing, ICICI Lombard, further clarifies that only renewal of policies (ICICI Lombard’s existing policyholders) and roll-over cases (lapsed policy cases or someone who wants to shift insurers) can buy the long term policy online. For brand new two wheelers, ICICI Lombard’s long term policy can only be bought offline at present.
However, while in case of a long-term two-wheeler policy, the insured is insulated from the fluctuations in premium every year, he/she is also unlikely to get any benefit if the premiums go southwards in future.
“True, long-term policy holders will not face any rate fluctuations, unlike the holders of single-year policies. However, you may not get the benefit of lower rates if the rates happen to be lower in between since you are already locked on to a higher premium for the remaining period,” explains Shetty.
Premium & IDV for long term policy vis-à-vis one year policies:
In case of a three year policy the total premium for the 3 years paid upfront is calculated as a percentage of the IDV of the two-wheeler at the beginning of the first year of the policy. However, for the purpose of claims the IDV depreciates each year as per the depreciation table fixed by the IRDA as applicable to regular one-year policies. This means that in case of total loss in the second or third year of the policy you would get the depreciated IDV of the bike and not the IDV on which the premium was initially calculated and paid. For example, if the IDV of your one-year old bike at the start of the first year of the 3-year long term policy is Rs 40,000 then the premium would be calculated as a percentage of this amount multiplied by three. For the first year of the policy, the IDV for claims would be taken as Rs 40,000 but for the next two years this IDV would decline as per the depreciation table normally used for one-year policies. Consequently, if the IDV depreciates by 10% to Rs 36,000 in the second year then in case of total loss you would be able to claim the depreciated IDV of Rs 36,000 and not Rs 40,000. Similarly, the IDV would depreciate again by 10% to Rs 32,400 in the third year (assuming no ‘total loss’ in the prior years). Therefore, in the third year you would be able to claim Rs 32,400 in case of total loss and not Rs 40,000.
What this essentially means is that as far as IDV of your bike is concerned it will depreciate in a manner similar to if you had bought three successive one year policies but the premium you pay for the second and third year would be higher than what would be payable for the 3 successive one year policies. However, there are certain compensating advantages in the long term policy: (i) the convenience of paying premium for 2-3 years at one go thus reducing paperwork and the necessity of remembering to renew on time; (ii) In case of a one year policy you would lose your No Claim Bonus (NCB) in case of even a single claim during the year. However, in case of ICICI Lombard’s three year policy this is not the case as explained above. This in fact, is the key advantage of a long term policy; (iii) Further, the discount on premium that you are likely to be able to obtain on purchase of a long term policy vis-à-vis a one year policy may offset the monetary downside of paying premium on a fixed IDV for the long term policy compared to paying premium on a depreciating IDV in case of 3 successive one year policies.
As this discount varies from case to case and insurer to insurer you will have to do your own calculations to compare the monetary cost of buying successive one year policies with buying a long term policy. Also, as long term insurance is a new product, its features and terms and conditions may vary from insurer to insurer. (for example, the NCB structure for long term policies is not, as yet, fixed by the IRDA and therefore may vary from insurer to insurer), buyers are advised to study and compare the policy with available alternatives on the basis of their individual requirements and preferences.
Even so, as the premium amount in case of two wheeler insurance is not very large – ranging from about Rs. 1400 for a one year policy for a one year old bike with IDV of say Rs 40,000 – the advantages mentioned above may well outweigh the monetary considerations (which may work out to be marginal) for some people.
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