Abhishek Bondia
In India, buying a third party (TP) liability insurance for motor vehicles is mandatory. Buying a car insurance for own damage (OD) is not compulsory. However, the compliance rate of this mandatory provision is low. As per a Supreme Court committee report of March 2018, only one in three vehicles hold third-party liability insurance. The purchase of insurance for own damage is even lower. The regulator, governments and courts have gone through several iterations to fix this conundrum. In July 2018, the Supreme Court ordered that all new vehicles should buy long-term third party liability insurance. Four-wheelers had to buy coverage for three years, and two-wheelers for five years. In August 2018, IRDAI asked insurers to develop long-term third-party liability policies to comply with the court orders. Also, it asked insurers to offer package policies that will offer long-term covers for both third party liability and own damage. Come August 2020, this long-term package policy, which combines TP and OD coverage, stands withdrawn.
The above iterations underline the complexity of the problem. Before we get into how it impacts the policyholder, following is some context behind these decisions. In the run up to its July 2018 order, Supreme Court noted that insurance companies had spent an amount of Rs. 11,480 crores by way of compensation for deaths, injuries, third party property damage and other damage due to road accidents during the financial year 2015-16. The smooth working of this compensation system depends upon the MACT courts taking decisions in a timely manner and the vehicles to have valid third-party liability insurance so compensation can be quickly paid. . Making it mandatory for vehicle owners to buy a 3-year or 5-year third party insurance was one way to ensure that such accident victims are compensated. The natural extension then seemed to be to offer long-term own damage cover to increase insurance attachment further. The auto dealer maybe in a good position to convince the buyer to insure his own damage, while he is buying coverage to insure claims from third-parties. However, these measures came under criticism from OEMs. The high upfront insurance cost was cited as a reason for low sales.
With this in the background, in June 2020, IRDAI issued orders for withdrawal of the long term package cover. It cited several concerns including challenge of actuarial pricing, affordability, and possibility of forced selling. This is a positive move for the policyholder, as the regulator has responded to concerns raised by the policyholders. However, for a common man, the frequent changes can be confusing. The impact of these changes would depend on when your vehicle was purchased.
Planning to buy after August 1, 2020
You will have to buy a long term third party liability insurance, three-year for four-wheelers, and five-year for two-wheelers. TP premiums are same across all insurers, and the coverage is identical. So, you do not have much of a decision to make. To insure your vehicle for own damage, there are two options. First, you could buy a ‘bundled’ policy. This will be a combination of long-term third party liability policy, and one year own damage cover. Second, you could buy two separate policies. One is a stand-alone long-term TP policy, and the other stand-alone own damage policy. Your no-claim bonus will accrue annually. You can use your no-claim bonus (NCB) to get a discount at the time of renewal of the own-damage policy.
Bought a vehicle between September 1, 2018 and July 31, 2020
You would have bought a long-term TP policy at the time of purchasing the vehicle. You can renew this as and when it comes up for renewal. At renewal, you will migrate to an annual TP liability insurance. If you bought a package insurance that included own damage for three years or five years, then on expiry of this period, you will migrate to an annually renewable own damage policy. The NCB accrued over the three-year or five-year period, will be availed at the time of first renewal. Note that your NCB is not valid for 3/ 5 years. Once you make a claim, the NCB will become zero. If you bought an annual own damage insurance, either as a bundled policy or as a stand-alone policy, then this remains annually renewable. NCB continues to accrue annually, and the discount can be claimed at each renewal.
Bought a vehicle before September 1, 2018
This order does not impact you much. Both your TP liability policy and own damage have been annually renewable. You can continue to buy annually renewable policies, either on a stand-alone basis or as a package policy. Your NCB gets accrued annually, and discount can be claimed each year at renewal.
Research estimates that about 40 per cent of cars that are more than three years old are uninsured in India. The first batch of long-term motor policies will come up for renewal only in 2021. We will have to wait and see how many policyholders renew. Some may hold a grievance about NCB, others may be happy with lesser upfront outgo, a few may miss the renewal date. If the renewal rates of the long-term policies turns out to be lower, we will have another set of challenges to deal with. Being uninsured and underinsured, is a chronic problem for the country. We need to step-up our enforcement efforts and at the same time make it easy for people to comply. Another one of the Supreme Court’s order of 2018, asks the state governments to seize and dispose an uninsured vehicle involved in an accident, unless the owner deposits a security sufficient to dispose the TP claim. That is a step in the right direction. Other ways to ensure compliance could be to mandate an active TP policy for a vehicle’s servicing and random inspections at petrol pumps. Premium financing, and auto-debit to bank accounts for renewals could be ways to ease adherence.
(The writer is Principal Officer & Managing Director, SecureNow)
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