Vehicles wade through water-logged tracks during heavy rains, in Mumbai. (Source: PTI)

Pay More Upfront For Your Motor Insurance From Sept. 1

Car and two-wheeler owners will have to pay more upfront for their insurance as only multi-year third-party covers are allowed starting Sept. 1.

Insurers will sell five-year plans for scooters and motorcycles, and three-year policies for cars and utility vehicles, for which the regulator notified prices on Aug. 29. These will be applicable for all new purchases and renewals. One-year covers will be discontinued.

Motor third-party insurance is a must for all vehicles. These plans, which contribute to a pool for compensating accident victims, are distinct from policies that allow vehicle owners to recover costs of repair.

The Supreme Court on July 20 made multi-year third-party insurance compulsory. Its decision was based on a report on road safety that found that only one in every three vehicles—from 18 crore plying on Indian roads—is insured. Insurance drop-off rates are as high as 75 percent for two-wheelers and 55 percent for cars, CLSA said in a note. That leads to victims or their kin not getting adequate compensation.

“This would help customers manage their premium outgo better as motor third-party is a volatile product and the premium used to get revised upwards each year,” Akhilesh Jain, whole-time director at Trinity Reinsurance Brokers, told BloombergQuint. “Due to higher pricing, insurers may also offer discounts on own-damage policies to make the comprehensive cover attractive.”

Agreed Rakesh Jain, executive director and chief executive officer, Reliance General Insurance. “This is a positive move towards increasing penetration of insurance in India. A lot of policyholders otherwise forget to renew or find it difficult to retain insurance afterwords,” he said. “For the own-damage part, it’s too early to comment. The premium needs to be worked out taking into consideration inflation on labour and spare parts.”

The Flip Side

Joydeep Roy, insurance leader at PwC India, isn’t convinced. “The only benefit will be that the problem of renewal of the third-party insurance will be assured for three-five years. That will not solve the bigger problem as most uncovered vehicles in the country are older than that.”

There are two ways that insurers can sell multi-year third-party covers:

  • Either offer a comprehensive multi-year package of both third party and own-damage components.
  • Or bundle a long-term third-party cover with one-year own damage policy.

An additional problem may arise if a customer chooses a three- or five-year third-party cover and a one-year own-damage policy, according to Roy. If the buyer renews the own-damage plan with another company, Roy said the added complication of having two separate insurers will be difficult to manage for claims.

Costlier covers may also lead many customers to buy only third-party covers to reduce costs, Roy said. “This will leave insurers with only high-end cars buying the own-damage covers, which will be difficult to manage because of the higher cost of repair and parts for such cars compared to the smaller ones. This will drive up losses, and consequently premiums.”

R Chandrashekhar, secretary general at General Insurance Council, a body of general insurers, agreed that the move may lead to own-damage market shrinking a bit. “The regulator has followed the direction of the Supreme Court and we will have to wait and watch to see how this policy would pan out for customers.”

The Insurance Regulatory and Development Authority of India has asked insurers to sell long-term own-damage insurance from Sept. 1. These plans will be filed with the regulator for approval by Sept. 15. “That would make assessing long-term risk difficult as prices of parts and labour costs are dynamic,” Roy said.

Impact On Insurance Reach

The regulator also abolished commissions and distribution fees on standalone motor third-party insurance. Earlier, such covers sold separately offered a 2.5 percent commission to agents and brokers.

That will demotivate intermediaries from selling these plans, affecting motor insurance penetration, said Jain. Something that the regulator wanted to improve with its long-term policies.

Motor segment contributes 40 percent to the insurance industry—18 percent from voluntary own damage and 22 percent from mandatory third-party, according to HSBC.

New multi-year motor contracts will benefit automakers and banks, while agents and online distributors could be negatively affected, the brokerage said, adding that own-damage premium rates could fall as insurers will compete to lock-in customers for longer tenures.

“Own-damage is the main source of income for insurance agents and distributors,” said Roy. “Reduction of this portfolio may hurt the distribution of insurance and overall shrinkage of the market, which will not be compensated for by the bulk collection of third-party premiums.”