Driving behavior may be taken into consideration while pricing a motor own-damage insurance product
Your three-year-old car is damaged, and you have put in a claim based on the motor own-damage insurance cover that you bought for the vehicle. Now, what if the claim amount that you receive is the same as the price you paid for the car three years ago?
Too good to be true? Not really.
The draft guidelines laid out by the Insurance Regulatory and Development Authority of India (IRDAI) for future own-damage insurance covers does exactly that.
The guidelines propose to ease depreciation-related norms to ensure that policyholders get a higher cover from insurers.
IRDAI, in draft guidelines on motor own-damage insurance, has said that the idea is to simplify the way the product is designed.
Rather than having one standard format for designing motor OD insurance, the regulator has offered multiple options for the cover. Motor OD cover protects the vehicle from physical damage. In case of an accident, fire that leads in total destruction of the vehicle, the insurer will pay the entire cost of the vehicle.
Here is a quick-look at how the motor OD covers are designed and what changes they will undergo.
How do the motor OD covers work now?
Motor OD covers are designed in a way that every year there is a depreciation on the cost of the on-road price of the car/two-wheeler.
The level of depreciation decides the Insured Declared Value (IDV). Depreciation means the amount by which the value of a vehicle reduces every year. This reduction is due to the fact that the parts of the vehicle are subject to wear-and-tear the older it gets.
As soon as the vehicle is bought and driven out of the showroom, depreciation kicks in. This ranges from 5 percent till the vehicle is six months old to 15 percent till it reaches one year. Every year, the value of the on-road price of car reduces by a percentage.
Once a vehicle is more than four years old (till the fifth year), 50 percent is deducted as depreciation. This means that, if you paid Rs 5 lakh to buy the vehicle and lose it to a fire after four years, you will only get Rs 2.5 lakh.
To ensure that a vehicle owner gets the exact price of his car/bike as sum-insured, an add-on cover called zero depreciation has to be taken by paying an additional premium. Once this add-on is taken, the insurer will pay the exact price of the car without any depreciation.
What will change?
Once the draft norms are finalised, the sum-insured that vehicle owners get will undergo a change. Depending on the type of vehicle, be it a private car, a two-wheeler or a commercial vehicle, the sum-insured may differ.
IRDAI, in its draft, has presented multiple options that could be used for deciding on the sum-insured of the vehicle.
For two-wheelers, the sum-insured may be 95 percent of the vehicle’s listed price for six months of the purchase. This will gradually go down to 90 percent till the bike is one-year-old and, finally, 40 percent once it is seven years old. Beyond the seventh year, the sum-insured will arrive at a mutually-agreed value between the car owner and insurer.
When it comes to private cars up to the first three years, there will be no depreciation. So, the sum-insured will be the listed price of the vehicle. Between the third and the fourth year, a depreciation of 40 percent will be applied. This will progressively increase to 60 percent between the sixth and the seventh year.
A third model has also been proposed that will be standard across vehicles. Here, the sum-insured will range from 95 percent of the vehicle’s price for up to six months since vehicle purchase. This will reduce every year to reach 30 percent for vehicles that are more than 15 years old.
When it comes to commercial vehicles, the working group said that the sum-insured will be the current day invoice value plus cost of bodybuilding, if any, and all accessories fitted thereon by the manufacturer. This will be adjusted for depreciation at the rate of 10 percent per year until a maximum of 75 percent.
Depending on the feedback of insurers, it is likely that IRDAI may either offer one standard sum-insured option or give insurers the freedom to have different sum-insured for each category.
Will insurers benefit?
Insurers will benefit from this move since the new norms will simplify the process of selling a cover. The IDV was a complicated formula which was difficult to explain.
Though motor OD has been relatively sustainable than the motor third party cover, driving behaviour has been a cause of concern expressed by insurers. Insurers have said that good drivers must be rewarded with lower premium while bad ones should be charged higher.
IRDAI, in its draft norms, has said that insurers can have ‘pay as you drive and pay how you drive’ covers. This will mean drivers’ behaviour and how much they drive every day will be the criteria for pricing the product.
Similarly, IRDAI has said that ‘named driver’ policy can be sold. This means that one person will be named as the driver of the vehicle in the policy. The insurer will pay a motor OD only if this particular person was driving the vehicle at the time of claim. Insured can choose whether to buy this cover or not since this policy is expected to offer cheaper premium.
When will the new norms kick in?After December 16, the deadline to receive stakeholder comments, the proposal will be finalised. It is likely that the final regulations will be brought in by February 2020.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.