- Date : 10/01/2019
- Read: 7 mins
This piece demystifies what’s been going on with motor vehicle insurance, gauges what the new guidelines are about, and informs how these will affect you.
If you are a car owner in India, you have probably been subjected to a barrage of headlines on the new motor insurance guidelines in recent weeks – Supreme Court directive, Madras High Court directive, General Insurance Council approval, insurance regulator’s directive, third-party insurance, compulsory personal insurance...
Wondering where all of this leaves you? Let us attempt to demystify what’s been going on with motor vehicle insurance, gauge what the new guidelines are all about, and inform you how these will affect you.
The first thing to understand is that the insurance sector watchdog – the Insurance Regulatory and Development Authority of India (IRDAI) – has come up with two separate directives. The first directive relates to compulsory personal cover, and the second directive to third-party insurance; it is the latter that will impact you more in terms of premium payments.
In the first order relating to compulsory personal cover, which is part of the motor insurance mandatory for all vehicles, IRDAI has directed all general insurance companies to raise the sum insured under the compulsory personal accident cover to Rs 15 lakh. The current level is Rs 1 lakh for two-wheelers and Rs 2 lakh for four-wheelers.
It also directed third-party insurance companies to include this in the cover offered to all vehicle owners or drivers – two-wheelers, three-wheelers, passenger, and commercial vehicles – for an additional premium of Rs 750 per year.
This directive came on the back of an order of a Madras High Court bench, which ruled that the Motor Vehicles Act of 1988 should make it mandatory for all car owners to have a comprehensive insurance policy, rather than just third-party insurance, so that all occupants of a vehicle are eligible for compensation in case of death or injury.
The court also directed the insurance cover to provide a higher personal insurance accident cover for the owner of the vehicle who is also the driver.
(Consequently, United India Insurance Co, the defendant in this particular case, accepted that under the then-prevalent rules, vehicle owners ended up paying the premium for risks taken by third parties without enjoying adequate personal compensation in return.)
The second IRDAI directive relates to third-party insurance. As per this, insurance companies have been asked to offer third-party insurance for three years (for cars) and five years (for two-wheelers); in both cases, vehicle owners are required to pay the premium upfront when the policy is purchased.
Earlier, you could pay the premium annually. However, after this new directive, you have to pay it as a lump sum in the first year for the required period (either three years or five years), and then again only at the beginning of the next due period.
This lump sum payment is only for third-party insurance. While it is mandatory for you to pay the premium for third-party insurance in a lump sum, own-damage policies may be paid either annually or as a lump sum.
While the directive regarding compulsory personal cover was the result of a Madras High Court order, the second directive on long-term third-party insurance was triggered by a Supreme Court ruling in this regard in July.
What the two directives have done is merely tweak existing motor insurance rules, which have two parts – one dealing with personal cover (also called first-party insurance), and the other covering third-party liabilities.
In first-party insurance, an insured person (the policyholder or the first party) is paid some compensation by the insurance company (the second party) in case of an accident or in case of some loss from that accident.
This accident may be caused by someone else (the third party) or by the policyholder himself/herself. This is one part of motor insurance.
The second part of motor insurance is the third-party insurance claim, which is usually made by someone else (the third party) – if the cause of the accident is the policyholder.
The most common type of third-party insurance claim is the ‘liability claim’, which the third party will file with your insurance company in case you are responsible for an accident that harms them.
Liability claims include medical expenses, compensation for suffering/pain due to the accident, and/or loss of wages. They come in two forms: injury liability claim (which covers costs due to physical injuries to the claimant), and property damage liability claim (which includes payments to replace spare parts, compensation for loss of a structure etc.)
The IRDAI decides the premium for third-party coverage every year, while individual insurance companies fix that of first-party insurance (own-damage cover).
The second impact of the IRDAI notification relates to compulsory personal accident cover; it is now a blanket annual premium of Rs 750 for two-wheelers and four-wheelers, applicable uniformly to owners of both new and old vehicles.
Compared to third-party insurance premiums, the increase here is more affordable, though pretty steep in percentage terms; earlier, the premium charged for two-wheelers and cars was Rs 50 and Rs 100 (excluding taxes) respectively.
Also, vehicle owners have the right to choose whether they want the annual payment option or the long-term option; insurance companies cannot force them either way, IRDAI said.
No or partial impact
The new insurance guidelines will have no bearing on the declared value of the vehicle concerned. This value, called IDV (Insured Declared Value), is arrived at on the basis of the selling price listed by the manufacturer, and is fixed at the time the policy commenced.
On the other hand, there will be some – if partial – impact on the No-Claim Bonus (NCB), which is applicable only on the own-damage portion of the premium, and not on the third-party portion. So, if there is no claim the previous year, the discount will be provided only on the own-damage premium.
IRDAI policy states that the maximum value of your vehicle can be 95% of its ex-showroom price, and this starts falling as soon as you step out of the showroom. For insurance purpose, depreciation is taken at 5% in the first year, 20% on renewal in the second year (80% of ex-showroom price), 30% in the third year, 40% in the fourth, and 50% in the fifth.
From the sixth year, 10-15% depreciation of IDV of the previous year is deducted y-o-y. The premium falls as the IDV decreases. Thus, if you bought a car on December 1 2018, your car's value depreciates by 5% in the first year, that is by December 1, 2019, and follows the depreciation chart as illustrated above.
Because third-party premiums will have to be paid upfront as a lump sum, it may look as if the premium to be paid has increased after the new directives, but this isn’t quite correct. As back-of-the-envelope calculations show, you stand to gain compared to a scenario where you had to make annual premium payments.
Also, the option to pay the own-damage premium either as lump sum or annually may work to your advantage: competition is likely to force insurers to keep rates low. The discount on personal accident cover may also work in your favour if you choose the long-term policy.
In the end, it boils down to getting quotes from various insurers before taking a call on what insurance policy to get. Buying motor insurance has evolved; take advantage of it.