Impending Impact of Long-Term Motor Insurance
As per the Motor Vehicles Act, third-party insurance is mandatory for all road-worthy vehicles in India. However, Insurance Industry estimate suggests that 70% of two-wheelers and 30%-40% of private cars plying on the Indian roads are uninsured. In 2015-16, India had around 19 crore registered vehicles; of these, only 8.26 crore were insured. The figures are alarming since India’s roads are notorious for their high accident rate, with 2015 alone recording over 5 lakh road crashes.
In the year 2015, two-wheelers were involved in 29% of the accidents, cars and jeeps in 23%, and buses in 8.3%. Transport experts emphasize the need for every vehicle to be insured as those without an insurance cause “huge liability to mishap victims”. The government of India report (Road Accidents in India-2015) puts the daily accident count at 1,374 and road fatalities at 400.
Conceivably in the wake of the foregoing facts on July 20, the Supreme Court ordered that third-party insurance cover for new cars be for a period of three years, and five years for two-wheelers. The order would apply to all policies sold from 1st September. The apex court of India directed insurers to offer long-term, third-party covers. Therefore from Saturday, buyers of new cars and two-wheelers must purchase upfront insurance cover for at least three and five years, respectively.
The Insurance regulator IRDAI has asked insurance companies to collect the premium for the entire term - three years for new cars and five years for two-wheelers - at the time of sale. The premium has to be collected for the entire term (three years or five years as the case may be) at the time of sale of insurance but would be recognised on a yearly basis.In other words, it will be recognised for each year as 1/n of total premium as Gross Written Premium during that year where ‘n’ is the term of the policy. Thus, the premium for the year will only be taken as income and the remaining premium will be treated as “Premium Deposit” or “Advance Premium”.
IRDAI has issued detailed guidelines and pricing for the new range of products recently.
``It would suffice if the insurers file a letter of Intent signed by the CMD/CEO, with IRDAI in the format specified by the IRDAI through e-mail and follow it up with a physical copy for records. A Unique Identification Number will be allotted to each product immediately on receipt of letter of intent, which will be filed before 30th August, 2018,'' said PJ Joseph, member, (Non-life), IRDAI while notifying the new norms.
Insurers may price the Own Damage component of the long term package covers suitably, in congruence with their current approach for pricing. In view of immediate need to offer long term package covers, insurers may start issuing such policies from 1st September, 2018 even while ensuring filing such products under the File and Use Guidelines before 15th September, 2018.
If the IRDAI finds the pricing approach in variance from their general pricing philosophy/approach for Motor Own Damage and not in line with actuarial principles, suitable direction may be issued by the Authority. As regards pricing of the one-year term component of the OD component of the bundled product, it shall be the same as in existence for the OD component of package policies currently.
The long term premium rates for a three year Motor TP policy-private cars not exceeding 1000 cc sold during the period - 1st Sep 2018 to 31st Mar 2019, is fixed at Rs 5286.For a vehicle exceeding 1000 cc but not exceeding 1500 cc, the premium is charged at Rs 9,534.Similarly,for a vehicle exceeding 1500 cc, the premium is fixed at Rs 24,305.
For a third party two wheeler policy, not exceeding 75 cc, the premium will be at Rs 1045,while for a two wheeler, exceeding 75 cc but not exceeding 150 cc, it will be Rs 3285. For a two wheeler, exceeding 150 cc but not exceeding 350 cc, the premium will be at Rs 5453.For a two wheeler, exceeding 350 cc, the premium will be at Rs 13.034.
The vehicles with lowest cubic capacity (cc) will be covered for much less premium as is depicted by the following charts.
The impact of the mandatory long term insurance cover will be multiplex -
1. As per the instructions of the regulator, no motor third party Insurance may be cancelled except on the following grounds:
1) Double Insurance
2) Vehicle not in use anymore because of Total Loss or Constructive Total Loss
3) In the event the vehicle is sold and/or transferred
2. The no-claim bonus would be applicable (on the own damage component only) when the entire policy term has been completed.
3. Long-term premium payments would proportionately raise the initial outgo on new vehicles, but save consumers from the botheration of renewals every year.
4. As vehicles age and depreciation accelerates, many owners tend to skip annual renewals but this initiative will certainly go a long way in reducing lapse ratio.
5. Penetration in the motor insurance portfolio will improve and more vehicles are going to be covered in near future.
6. The insurers will be bound to ensure that third party insurance cover is available to all proposers through online channels as well.
7. As the general insurers will also liaise with the police authorities to facilitate issuance and renewal of third party insurance cover, there will be productive coordination between the insurers and police department in the future.
The general insurers have welcomed this step which was readily taken by the regulator following the instructions from the apex court of India. According to Mr. Rakesh Jain, CEO, Reliance General Insurance, this is a positive development as many owners forget to renew their policies after one year.
International Post Doctoral Researcher | Senior Member IEEE | Associate Professor | Guest Editor at Sustainability MDPI | Quality Support-IQAC | 9K+ Connections
6 年Dear Mr. B R Singh Sir, Congratulations and Heartiest wishes for your nice article.? Keep doing the good work. wishing Many more? informative articles to be published by you. Thanks and Regards Dr. Kamal Gulati
Chief Manager - Health Underwriting
6 年Sir, why TP policy will get cancelled in case vehicle sold or transferred
Senior Consultant | Bridging Business-Technology Gaps | Insurance & Analytics Expert | Master in Data Analysis, Dashboards & UAT | 15+ Years Delivering High-Impact Results
6 年Even in Motor Insurance now, Installment Facility should be made available. Buying a long term Package Policy for 3+3 or 5+5 cost will be high which may not go down well with customers..
Senior Consultant | Bridging Business-Technology Gaps | Insurance & Analytics Expert | Master in Data Analysis, Dashboards & UAT | 15+ Years Delivering High-Impact Results
6 年Well it's a gud decision to increase tenure of polices. One point that should have been taken care by IRDA is PA owner driver, or rather PA cover.. Initially 1 Lac was provided for PA owner driver for 1 year.. currently though customer is paying now entire 5 year or 3 years Sum insured for PA covers should have been increased atleast.. this one aspect should have been looked by IRDA.. Further said decision is beneficial to insurance companies who have dealer, OEM tie-up already.. also there are many questions needs to be raised regarding 1 year OD and 3 or 5 year TP.. IRDA should have given more thought as its a structural change in system of all insurance company especially renewal of OD component only etc.
Advocate, Arbitrator, Ex General Insurance Professional
6 年There is a lot of talk about who will be benefited most by this move. It has been said that this will benefit the claimants whose claims would otherwise lie against owners of uninsured vehicles. In the absence of insurance, the owner and driver of the vehicle are liable to pay the award amount jointly and severally. But all claimants and their lawyers know that while the insurer will without doubt satisfy the award, either in the first instance or after after the decision on the appeal, the owner and driver may not have the means to do so. Even if they do have the means, getting an an award executed against individuals is much more difficult, time consuming and costly affair than one against the insurer. So, almost all such cases get filed against a vehicle which had a valid insurance policy, mostly with the help of the insured, who lends his vehicle's name to the cause of the claimant for a fee. It is widely believed in the industry circles that such substitution of vehicles takes place with the active support of the police. So even as the insurers lose out on the premium of the uninsured vehicles, they are nevertheless hit by the claims arising out of the third party accidents caused by them.