In a blow to car owners, motor insurance to become expensive from Sept 1

Motor insurance covers will become more expensive, as the Insurance Regulatory and Development Authority of India (IRDAI) instructed insurers to begin selling ‘long-term’ motor third-party (TP) policies from September 1 onwards. On July 20, the Supreme Court, in a move to provide a larger security cover for Motor TP liabilities, ordered that new car owners purchase a three-year TP cover, and new two-wheeler owners purchase a five-year TP policy.

Motor TP policies provide the vehicle owner with a security cover in case an accident results in the loss of life or injury of a third-party, which could mean property like vehicles, or an individual.

Traditionally, general insurance companies sell motor Own-Damage (OD) policies and TP policies either separately, or together in a ‘comprehensive’ package. While some customers have to renew their motor insurance policies (OD and TP) every year, some companies offer two-wheeler buyers a three-year motor TP cover.

Abhay Kumar, Executive Vice President for motor insurance at IFFCO Tokio General Insurance said, “This is a welcome gesture as it will minimise the presence of non-insured vehicles to a large extent. The major beneficiaries are the road accident victims as henceforth they will be fully protected in case of being hit by an uninsured vehicle.”

Both IRDAI’s instructions and the Supreme Court’s order specifically talk only about new vehicle owners. Insurance executives told Business Standard that they are seeking clarity from the regulator about whether the same guidelines will apply to existing vehicle owners/policyholders, who have to renew their motor insurance policies in the coming months.

IRDAI has asked insurers to notify their long-term motor insurance policies by August 30, under the “File and Use” process, which is usually reserved for commercial insurance covers. Retail insurance policies have an entirely different regulatory and compliance process before products are launched, which takes anywhere between one to six months for IRDAI to approve.

An executive at a general insurance company said, on the condition of anonymity, “The regulator has sent these instructions in a hurried manner to comply with the Supreme Court’s order. IRDAI seems to want insurers to move fast and roll out retail motor insurance policies, but they will look into the premium pricing later, which makes this an exceptional case.”

According to the instructions sent by IRDAI to insurers on August 28, buyers of new cars and new two-wheelers will have to pay the total premium upfront for the entire term (three or five years).

“One of the major disadvantages is that the upfront payment of premiums may be unaffordable for the middle-class customers,” said Kumar. 

 “Customers will be insured for a longer term despite having to pay more money upfront, than before. In the initial period I personally see a relative impact on the sales of motor insurance policies, which is a little concerning, but I see it subsiding thereafter,” said Pankaj Arora, President of Retail Business at Liberty General Insurance Company.

The insurance regulator sets the price for motor TP policies every year (revised premium rates are shown in Table 1) while the motor OD premium rate is set by insurers based on actuarial analysis.

“The premium for the OD component needs to be worked out taking into consideration inflation on labour and spare parts over the future policy period. The industry needs to gather more data points and decide on the pricing approach,” said Rakesh Jain, Executive Director and Chief Executive Officer at Reliance General Insurance Company.

Experts say this condition for upfront payment will immediately affect buyers because it will increase the total premium payout for the customer at the time of buying the insurance policy in the first year and that they will not receive a discount on renewal until the policy matures.

“There may be a spurt in small claims as the premium is flat for three or five years. This will also make it difficult for insurers to reward the good customers,” said Kumar.

IRDAI has asked insurers to either offer customers a long-term policy covering both OD and TP liabilities or an insurance policy that combines a long-term TP cover with a one-year OD cover, when it comes to comprehensive products. 

This poses a challenge for insurers on the pricing of premiums as well as on ensuring proper administration claims management especially in the case of a bundled product which has a long-term TP cover (three or five years)  and yearly OD component, said insurers.

“TP accounts for 15 per cent of the Sum Assured for private cars, which would increase to 35 per cent in a three-year policy, so the impact will not be that high. However, the impact would be higher for two-wheeler vehicles as the TP component is around 55 per cent, which on five-year basis increases substantially,” said Arora.

An analysis of the premium breakdown and total payout for customers in the case of comprehensive motor insurance policies in Table 2 and is for a Maruti Suzuki Swift 2017 model, Diesel. Further, the analysis also assumes that the OD component of the insurance policy will be renewed after one year, therefore the same premium rate of Rs 15,000. 

The table shows that the premium payments for a comprehensive cover, given the assumptions, will increase by Rs 7,873. If motor OD cover is renewed every year customers will incur Goods and Services Tax at 18 per cent, every year. 

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