Big Story. Cover your tracks

Did you know that the Royal Enfield bike you have been eyeing for long has become pricier by ₹12,000-15,000 over the past month? The increase in the on-road price of cars has been steeper. The new Hyundai Creta E+ is costlier by ₹25,000.

This is because the insurance cost — which forms a part of the on-road price (what you finally pay the dealer) — has gone up significantly. This is following a Supreme Court directive on mandatory long-term insurance, which came into effect on September 1.

The ruling makes it compulsory for buyers of new two-wheelers and cars to shell out upfront the cost of third-party insurance for a term of five years and three years, respectively. Earlier, insurance was bought for one year at the time of purchase of the vehicle and renewed subsequently at the end of every year.

Further, a diktat from the Insurance Regulatory and Development Authority of India (IRDAI), increasing the personal accident cover in motor insurance policies for two-wheelers and cars from ₹1 lakh and ₹2 lakh, respectively, to ₹15 lakh, has also bumped up the premium on insurance cover.

But it’s not just higher premiums that you have to deal with. The directive has opened up a Pandora’s Box, with insurers offering numerous permutations and combinations of policies. For instance, for a car, one can opt for a) a three-year third-party, plus a three-year own-damage insurance, or b) a three-year third-party, plus a one-year own-damage insurance, or c) a three-year third-party insurance alone.

In addition, the new ruling also has a bearing on the no-claim bonus (NCB).

We look at the various tweaks and changes, and help you evaluate the various policies available.

Back to basics

Motor insurance has two components — a third-party (TP) cover and an own-damage (OD) cover. Under the Motor Vehicles Act, 1988, while the TP insurance is mandatory, the OD cover is optional.

TP insurance covers the legal liability arising out of damage to the property of a third party or bodily injury or death of a third person when your vehicle hits another vehicle or person. The liability is unlimited in the case of injury or death of a third party; the compensation is decided by the court or mutually agreed upon.

The OD insurance, as the name suggests, is for protecting your vehicle against damage or theft.

In the OD cover, the premium is calculated based on the insured declared value (IDV), which is the market value of a vehicle at any particular time, less depreciation (depending on the age of the vehicle). For a new vehicle, the IDV is usually the ex-showroom price. In other words, it is the maximum amount an insurer will pay you in the event of a total-loss claim.

While insurance companies have the leeway to increase or reduce the OD premium based on various factors (say, cost of the distribution channel), they can’t fiddle with the TP premium rate. The TP insurance premium is fixed by the regulator — IRDAI.

The TP premium is, however, only a small portion of the premium in a comprehensive motor insurance policy. For instance, the annual TP premium for a Maruti Suzuki Alto 800 (Standard) - 796 cc is ₹1,850 (it is the same for all cars of less than 1,000 cc). The one-year OD insurance premium for the car comes to ₹5,000-7,000 (if the policy is bought online).

Till August 31 this year, any two-wheeler/car buyer had the option of buying either a one-year TP cover or a comprehensive plan that offered a one-year TP cover along with a one-year OD cover. But, beginning September 1, it became mandatory for all new two-wheelers and cars to have a long-term TP cover — three years for cars and five years for two-wheelers. Hence, the premium on motor insurance shot up. Given that the insurance cost is normally not included while considering the cost of the vehicle for taking a loan, you now have to shell out more from your pocket. With a premium of ₹750 a year, the mandatory ₹15-lakh personal accident (PA) cover also adds to the cost.

Higher costs aside, you also need to understand the various plans on offer to select a suitable policy. Here are five factors that can help you decide.

Longer OD cover costs less

Before you compare costs, remember that the OD cover you opt for is what impacts your overall insurance cost. As the TP cover is mandatory and decided by IRDAI, its cost will be similar across policies.

If you think taking a longer OD cover of three or five years now (as against a one-year policy earlier) will cost you thrice or five times as much as before, you can rest easy. Insurers are now offering a discount of 10-15 per cent on the premiums to lighten the blow.

For instance, for a new Honda Amaze, , New India Assurance charges ₹5,628 for a one-year OD policy, and ₹14,515 for a three-year OD cover (14 per cent lower than 3x cost of one-year OD). However, note that a long-term OD product locks your flexibility to switch to a new insurer in the subsequent year. Switching to another insurer, though allowed, involves paper work.

Industry veterans are of the view that by next year, when insurance companies would launch standalone OD products, prices could become more competitive.

Tarun Mathur, Chief Business Officer, General Insurance, PolicyBazaar.com , said: “Earlier, insurance companies had to look at the risk collectively (TP and OD together). If one component was good, the other was bad; somewhere, it neutralised the price advantage the customer was supposed to get. But now, since the insurance companies are not carrying the TP risk, they will be very aggressive on the OD-only policy pricing.”

That said, if you are not all that prompt with keeping track of premiums and don’t like the hassle of renewals, you can consider buying a combo of three/five-year TP along with a three/five-year OD.

Bottom line: While longer OD covers appear cost-effective, you can opt for a one-year OD cover (with three/five-year TP) for now. Standalone OD covers may cost you less on renewal next year.

No standalone one-year OD

Earlier, since your choice was between a standalone TP cover or a combo of a TP and an OD cover for a year, there was no need for a standalone one-year OD policy. But now, since a buyer can take a one-year OD cover along with three/five-year TP, she will have to renew the OD cover the next year. This implies that insurance companies will have to come out with standalone one-year OD policies. But firms are yet to introduce such products. It may be a year before such policies are available, say market experts.

Bottom line: While the insurance cost has gone up markedly this year owing to the long-term TP cover, don’t try to save on cost by skipping the OD cover. You may not be able to buy a standalone OD cover mid-way this year.

Inbuilt NCB discount

A no-claim bonus is the reward the holder of a motor insurance policy gets for not making a claim in the preceding years. This is given as a discount — of 20-50 per cent — on the OD cover premium. The NCB benefit increases by 10 per cent every year and hits 50 per cent at the end of five continuous years of no claims.

Until now, as the OD cover was only for a year, it was easy to gauge and give the NCB benefit for every year of no claim. But, with longer-term OD products now, this gets tricky. While some policyholders may not have made any claims in the first year, they would have claimed in the second or third year; others might not have claimed in the first two years, but claimed in the third year, and so on.

“Insurance companies that have launched comprehensive motor cover with three/five-year TP and three/five-year OD have built the NCB benefit into the policy,” said Mathur.

The cost of the OD premium cover in a comprehensive policy is not a straight 3x or 5x of the premium of a one-year OD cover. BusinessLine analysis showed that long-term OD premiums carry a discount of 10-15 per cent for cars and 25-35 per cent for two-wheelers.

Bottomline: Buying a one-year OD and renewing it every year will work out simpler if you are sure of claiming NCB. Also it is easier to get the NCB benefit transferred (to a new policy) in case you choose to sell the car and get a new one.

Insurance at dealer more expensive

Insurance premium is relatively expensive when bought from the dealer. A recent study by BusinessLine showed that premium rates on cars at the dealer end is almost double the price at which it is available on online portals. And, post the new ruling, insurance costs at the dealer end have only sky-rocketed further.

Insurance premium on a new Hyundai Creta 2018 E+ (petrol), with a three-year TP and one-year OD cover (for IDV ₹10 lakh) works out to ₹37,096 with New India Assurance. For the same car and same policy specifications, the premium at the dealer’s is about ₹66,215.

Also, beware of dealers selling you long-term OD cover as that will cost you much more and leave you with little leeway to change your insurer the subsequent year.

Bottomline: Shop online for your motor insurance. PolicyBazaar.com and RenewBuy are among the sites where you can compare costs and buy a policy.

Premium refund

If you end up selling your vehicle within the first three/five years of purchase or want to switch to another insurer because of poor service, but have already paid the premium for a long-term policy, you can write to the insurance company to cancel the policy. You can ask for a refund of the premium for the period in which the vehicle won’t be under your ownership.

Bottlomline: You can claim a refund of the premium even if you sell your vehicle mid-way through the policy period.

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