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New car insurance rules decoded: Impact analysis
Financial Express, July 10, 2019

Over the past 12 months or so, there has been the introduction of several new rules and guidelines and subsequent modifications in the motor insurance space. The end-user who owns a car or a bike and wishes to get insurance for the first time or renew an existing policy could be lost and facing confusion regarding car insurance or two-wheeler insurance.

We spoke to Rakesh Goyal, Director at Probus Insurance, on what the new guidelines implemented by IRDAI pertaining to motor insurance actually mean and how should a policyholder take cues before buying insurance.

In the recent past, there have been several changes in the motor insurance space. How will it impact the policyholders and what challenges do you foresee?

In the last year, there have been several changes that have taken place in the motor insurance sector in India. Recently we saw the Insurance Regulatory and Development Authority of India (Irdai) increasing the third party premiums rates by 15-20 per cent for a few segments of four-wheelers as well as two wheeler insurance. While in the past, the regulator had announced insurers to provide long term insurance policy for both four-wheelers and two-wheelers and provide a minimum cover of Rs 15 lakh under personal accident cover (PAC).

What has been the impact of making car and bike insurance policies long term in nature?

There is no denying that measures taken by the regulators will eventually benefit policyholders, but changes have also considerably increased the final premiums paid by the policyholder. Non-life insurers will rejoice over the increase in third-party premiums as they were witnessing huge underwriting losses in the segment. This move could bring in some relief to insurance companies.

What led to introducing long term policies in the car and two-wheeler insurance space?

Following a Supreme Court order last year, Irdai has asked all the general insurers to offer long-term mandatory third-party insurance cover. Accordingly, the third-party insurance cover for new cars will be for three years, while the cover for new two-wheelers will be for five years. Such a move would further improve penetration of insurance in India as many policyholders either forget or don’t renew the policy, posing risk to their lives.

What has changed in the compulsory personal accident cover a portion of the policy?

Regulator unbundled the compulsory personal accident cover (CPA) and allowed the issuance of standalone policies. IRDAI asked insurers to provide a minimum cover of Rs 15 lakh under CPA for owner-driver vehicles at a premium of Rs 750 per annum for annual policies for both cars and two-wheelers. Earlier, the CPA for two-wheelers and private cars/commercial vehicles was Rs 1 lakh and Rs 2 lakh, respectively. These steps were taken in the right direction, but again it increased the premiums for the policyholders and thereby increasing the overall cost of buying a vehicle.

Has the issuance of long term insurance policies impacted auto sales?

A motor insurance policy has three components which are a third-party liability (TP, which covers damage to others), own damage (OD, which covers damage to owner’s vehicle), and personal accident (CPA) cover. Third-party and CPA comprise the mandatory part of the motor cover while OD cover is optional.

Though there’s no direct connection between insurance premiums and auto sales coming down, such share increase in premiums will certainly pinch people. For example, if third-party insurance is for Rs 2,000 per year, now policyholders need to pay Rs 6,000 upfront while buying the car for three years at one go. We also need to look at the impact of slowing auto sales on the insurance industry

. According to the data from General insurance Council, for the last financial year, the motor insurance saw gross premiums underwritten at Rs 64,454.86 crore as compared to Rs 59,247.97 crore in the previous financial year growth of 8.8%.

Motor insurance has two components, one being a third party (TP) and other own damage (OD). So motor OD saw gross premiums underwritten at Rs 26,473.23 crore as compared to Rs 26,329.88 crore in the previous financial year growth of 0.5%. While motor TP grew by 15.4% in the last financial year. With motor segment one of the important parts of the non-life insurance industry, we need to look at growth in the sector, favourable premiums to policyholders and at the same time slowing of underwriting losses in the motor segment.

What does the new rule to be implemented from September 1, 2019?

As per the Supreme Court order, the Insurance Regulatory and Development Authority of India (IRDAI) were directed to implement the bundling of cover for the Own Damage portion as an immediate necessity from 1st September 2018.

This bundled cover had both essential components, i.e. Own Damage (OD) premium and Third Party (TP) premium. Under bundled cover, a one-year Own Damage component was bundled with a three year and five-year third party liability cover for a two-wheeler and private car respectively.

Before this regulation, the only option was to renew the OD component from the insurer from whom the TP policy is bought. However, with this regulation, renewal of OD policy independently from a different insurer is now possible.

By making the changes in the earlier orders, the IRDAI has asked the general insurance companies to make their customers available with the standalone annual Own Damage (OD) covers for both cars and two-wheelers. Moreover, this new regulation would be applicable not only for new vehicles but also for old vehicles. Will it help policyholders?

It is also a good incentive for all the policy seekers or policyholders who were looking for standalone options after the bundled policy regulation effectiveness. As after 1st September, the policyholders are not bounded to the same insurer to renew the OD cover in the following year, even those who had bought a bundled policy from a different insurer. Policyholders can renew OD policy as a standalone plan from another insurer despite having TP from another insurer. And for insurance companies, this regulation offers clarity for providing OD covers to their customers.

The insured need not stick to the same insurer for both OD and TP policy. Rather than continuing with the one you had for the third party, you have a choice to renew the Own Damage part from another insurer as well.

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