New insurance rule to raise on-road price of cars, two-wheelers, hit sales

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The new motor insurance regulations to take effect from Saturday would, fear officials at automobile companies, impel those wishing to buy cars or two-wheelers to postpone purchasing.

Car dealers have been flooded with calls from buyers who had booked new vehicles in the past fortnight. The new regulation mandates buyers of cars and two-wheelers to purchase upfront insurance cover for at least three and five years, respectively. On August 20, the Supreme Court directed insurers to offer long-term third-party covers. Insurance is mandatory for all road-worthy vehicles in India but owners tend to skip renewing the policies after these lapse. A longer tenure and upfront payment of the premium would save buyers the trouble of annual renewals but would proportionately raise the initial outgo on new vehicles, pushing up the on-road prices.

“There is a lot of confusion in the market,” said a Maruti Suzuki India dealer. "This is being done without any prior intimation. Customers who booked a few days before have been calling to know what would be the additional outgo."

Depending on the engine size, the premium will vary. For instance, the initial cover for a three-year period on a new private car exceeding 1,500 cc will be about Rs 20,000, up from Rs 7,900 now for a one-year period. For motorcycles with an engine capacity beyond 350cc, the buyer will have to pay Rs 9,000-10,000 for a five-year cover, as against Rs 2,300 currently for a one-year period, say automobile dealers.

Car makers say the move will disrupt sales only temporarily. “Doubtless, there will be short-term pain for consumers and for us as manufacturers. Consumers will tend to postpone purchase but we expect the situation to settle soon,” said an official at one company, declining to be identified. 

“There are discussions regarding giving insurance companies a breather for a month or so,” said an executive at another car company.

“There could be some impact in the short term, as the initial outgo for buyers will go up,” said Sugato Sen, deputy director general at the Society of Indian Automobile Manufacturers.

Under the new regulation, buyers have an option. Either to choose a one-year policy that includes premium payment for  own damage (OD) plus three-year mandatory third-party (TP) premium or a comprehensive cover for both OD and TP for three years each. The increase in premium will be sharper if a buyer goes with the second measure.

There are some ambiguities, said an official at a car company cited earlier. For instance, it does not clarify the provision if a buyer is looking to switch his insurance provider before three years. While the OD can be managed by the new company, what happens to the lumpsum deposit the buyer has already made? 

Also, unlike the current scenario when one gets the no-claim bonus’ in the second year if the vehicle hasn’t met with an accident, one will have to wait three years for this. One does not know how the insurance regulator will address it, said the official.

Two-wheeler companies are also bracing. To tide over the impact of a possible slowing in sales, Bajaj Auto on Wednesday announced free insurance for select models till Friday. Its rivals have refrained. A Hero MotoCorp spokesperson said it had no such plan, while adding the new regulation would translate into an increase in the on-road price of motorcycles and scooters, affecting retail sales in the short term. “However, the demand remains robust and we expect this to continue in the long term,” he said.