No driving a vehicle without insurance

Enforcing this will help reduce the premium





The Insurance Regulatory and Development Authority (IRDA) has proposed an almost 50 per cent hike in almost all categories of third party insurance policies effective from April 1, 2017.

‘Insurance is not bought but only sold’ holds good in India for all types of insurance, including mandatory motor third-party insurance coverage.

It is called a third-party cover because the beneficiary of the policy also includes a third party other than the two parties involved in the contract (the motor owner and the insurance company). It covers the insured’s legal liability for death/disability of third-party loss or damage to the third-party property.

Let us understand the same through a simple example. Assume, for instance, that a two-wheeler owner mistakenly hit a rich businessman who is walking on the road and he died. The entire onus of fulfilling the liability towards the heirs of the rich businessman rests now with the two-wheeler owner.

The liability can be roughly based on the typical earning of the businessman during his lifetime. If it works out to be, say, ₹5 crore, it may be impossible for the two-wheeler-owner (who earns only ₹10,000 per month) to pay his way out of the liability.

In such cases, third party insurance comes to the rescue and it also helps the government to unburden some of its responsibilities towards the victim. So, the government made third party insurance coverage mandatory for all motor vehicle owners.

Another type of insurance, namely comprehensive insurance coverage, comes out with two components (third party insurance plus own damage insurance). Own damage includes the insurance indemnification of the losses to the body of the car, to the travellers, etc., depending on the policy terms and conditions.

Better coverage a must

When a new vehicle is sold, it comes out with either third party insurance cover or comprehensive insurance cover but in subsequent years many owners do not get their insurance renewed.

In this process, the premiums rise heavily and penalise those who renew their insurance every year. Those who don’t pay premium may appear happy-go-lucky people but they run the risk of meeting the liability when they cause damage to any third party.

Most vehicle owners drive the vehicles without insurance just because enforcement powers rest with one agency such as the government — through traffic police or motor vehicle inspection authorities — whereas servicing aspects rest with another agency, namely insurance companies.

If the majority of vehicle-owners take insurance, then the premiums are likely to come down as it is sharing of losses. Let us assume that out of 10,000 vehicles on the road, 50 vehicles end up with accidents and the loss amounts to, say, ₹50,000.

Then, if we assume that all the vehicles are insured, the simple math is that risk premium is just a division of ₹50,000/₹10,000 which is ₹5 per vehicle.

If only 5,000 vehicles are insured and we assume that the same ₹50,000 is the loss, for illustration purpose, then the premium will be ₹50,000/₹5,000, which will be ₹10. Hence it is important to increase the number of vehicles insured so that the premium can be reduced.

The way out

If the government can pull out all the old notes in a record time of less than two months, it is not difficult to ensure that all vehicles plying on the road are insured.

Here are some suggestions on how this can be done.

The government can integrate the database of all the vehicles with their registered numbers into a single data warehouse and similarly integrate all the vehicle insurance policies into a warehouse (which is present to some extent now).

But it must be refined and doable, given the advancements in the analytics and data warehousing technologies.

The government could also mash up the policy details with the insurance details, which should bring out the list of defaulters and send them notices.

Make it mandatory for vehicle owners to produce a copy of the insurance policy when they go for filling up fuel or when the vehicles go for servicing.

When a vehicle is found running without insurance, instead of penalising the owners, the traffic police/motor vehicle authorities can provide them on-the-spot third party insurance coverage.

Insurance companies would be glad to assist the authorities in this regard. In such scenarios, Home guards can assist police for a few months to help them issue policies on the spot.

More insurance companies should come forward for multi-year motor insurance policies since, as of now, only a few offer such policies.

The IRDA must do its bit on promoting the concept that having motor vehicle insurance is as important as holding driving licence while people are behind the wheel.

India as a country has shown more resilience in the recent past as we have seen with regard to demonetisation.

It is important to see third-party insurance not as a commercial product but as national security and as a product of national interest.

P Saravanan is Associate Professor of Finance & Accounting, IIM-Shillong. S Jayaprakash is co-founder of Nanobi Data and Analytics, Bengaluru

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