 "Reforms to make motor insurance policies costlier, but that's good news")
Two important regulatory changes have been made to the motor insurance policy in recent times, both at the prompting of the judiciary. The minimum tenure for which a third-party (TP) policy can be bought has been hiked and the minimum sum assured on the personal accident cover has also been increased. While these new rules will make motor insurance policies costlier, they will also ensure enhanced protection to accident victims (or their families) and vehicle owners.
Tenure of TP cover hiked: A significant proportion of vehicles, especially two-wheelers, that ply on Indian roads are uninsured. Due to this, victims of road accidents, or their dependants, often end up not getting any compensation. To avoid this, the Supreme Court mandated that new private car and bike buyers would have to purchase long-term TP motor insurance cover from September 1, 2018. Earlier, when customers bought a new car or bike, they had to buy TP cover compulsorily for one year. Now new car purchasers have to buy TP cover for minimum three years, while bike purchasers have to buy it for five.
The Insurance Regulatory and Development Authority of India (IRDAI) has come up with three product options. For a car buyer, the first is 3+0: three-year TP cover and no own damage (OD) cover. The second is 3+1: three-year TP cover and one-year OD cover. And the third is 3+3: three-year TP and three-year OD. The options for a new bike purchaser are 5+0, 5+1, and 5+5. When older car and bike owners renew their covers, they can still buy a one-year TP cover.
Positive for victims: When an accident happens, causing death or disability to a pedestrian, the victim's family sometimes gets nothing if the vehicle is uninsured because the owner/driver lacks the means or is not traceable. If there is a TP cover, the insurer pays the compensation.
This move will benefit customers as well. “They will be saved the hassle of renewing their TP cover every year. A long-term policy will also insulate customers from possible premium increases for three or five years,” says Subramanyam Brahmajosyula, head-underwriting and reinsurance, SBI General Insurance.
Customers will, of course, have to pay a higher upfront premium at the time of buying a new car or bike. But over a three- or five-year span they actually stand to save some money. “The new rates are for a multi-year plan. The customer will actually save money than if he were to pay the premium each year (see table) since the third-party premium rate increases annually by 25-30 per cent on an average,” says Sajja Praveen Choudhary, head-motor insurance, Policybazaar.com.
There are a few lacunae in the policy change. Long-term TP cover should have been made mandatory for older cars and bikes as well. “In India most people do buy insurance for new vehicles. It is when they get older that people don't renew their covers. So, this rule may have limited impact in terms of enhancing motor insurance penetration,” says Animesh Das, head of product strategy, Acko General Insurance. This rule has also not been made mandatory for commercial vehicles, which account for a higher percentage of TP claims.
With a long-term cover, the customer will be stuck with the same insurer for three or five years even if the latter does not provide good service. “With annual renewal, he could have shifted to an insurer known to offer better service,” says Das.
Higher sum insured for personal accident cover: A motor vehicle insurance has three components: TP cover, OD cover, and personal accident cover for the owner. In case of death or disability, earlier the sum insured was Rs 100,000 for a bike owner and Rs 200,000 for a car owner. The premium for this cover was Rs 50 for bike owners and Rs 100 for car owners. The Madras High Court recently issued an order saying that the sum insured of Rs 100,000 and Rs 200,000 are too paltry and should be hiked. IRDAI then hiked the premium for this cover to a minimum level of Rs 1.5 million, and applied a premium of Rs 750 to it. Both TP and personal accident are mandatory covers.
According to Devendra Rane, founder and chief technology officer, Coverfox.com, “Car owners don't need to worry much about this development as the impact will be marginal for them.” This move may, however, pinch bike owners. Take one example. Suppose that earlier the TP cover for a 100-cc bike was Rs 720 and the owner cover cost another Rs 50. The total cost came to Rs 770. Add to this the GST of 18 per cent, which would take the cost to Rs 885. In the new scenario, the TP cover remains at Rs 720 but the owner cover rises from Rs 50 to Rs 750, so the mandatory covers alone now costs Rs 1,470. Add GST and the cost goes to Rs 1,735.
This step is positive for the owner-driver as he will now get a Rs 1.5 million cover. But it could prove tricky. People often don’t buy insurance for older vehicles, especially bikes. With costs going up, more may avoid doing so.
Do the due dilligence: Car dealers often coerce new car buyers into purchasing insurance at the showroom itself by saying that the price discount and other benefits are contingent upon the purchase of insurance. But doing so has its disadvantages. According to Choudhary, the cost at which dealers sell insurance covers is often way higher than what a customer could get from an insurance aggregator’s platform. “With multi-year policies being sold now, the cost of insurance will become a substantial portion of the total cost of the car. So, customers need to do much more due diligence before buying the insurance cover,” says Rane. He adds that customers should ensure they buy the add-on covers they need and are not saddled with ones they don’t need. Comparing features and costs online has become a must after the recent regulatory changes.
