Car insurance gets expensive: Buy comprehensive cover despite rise in premium

If Irdai approves proposed revision in 3rd-party premium, insurance on cars could rise by 15-20%

Vehicle owners will have to shell out more for motor insurance premium from April 1, when the revised tariffs for third-party motor premium come into effect. Earlier this month, the Insurance Regulatory and Development Authority of India (Irdai) released the draft guidelines for revision of third-party premiums for 2017-18. In some categories, the proposed hike is as much as 50 per cent.
 
The motor insurance segment is loss-making for all the insurers. “There are millions of vehicles on the road without third-party insurance. Our proposed hike in the draft guideline is to reduce losses for insurance companies,” says TS Vijayan, chairman, Irdai.
 
Motor insurance has two components. One is own damage cover, which takes care of the financial impact due to accidental damage or theft of the vehicle. The other is third-party liability cover, which takes care of the financial liability in case the vehicle hits a third party, causing death or bodily injury, or causes damage to property belonging to a third party (to a limited extent).
 
According to Irdai’s draft guidelines, premium rates for smaller private cars with engine capacity less than 1,000 cubic centimetres (cc) have not been hiked. For cars above 1,000cc, the rise is 50 per cent. For two-wheelers less than 75cc, there is no hike and for 75-150cc, the proposed hike is 16 per cent; for higher capacity engines, it would be 41-50 per cent.
 
Some cars below 1,000cc engine capacity are Maruti Alto, Hyundai, Renault Kwid, Chevrolet Beat etc. Those between 1,000 and 2,000cc are Maruti Suzuki Swift, Hyundai i10, Tata Tiago, Honda City, etc. “The own damage portion is de-tariffed and individual companies hike rates based on their claims history. Only the third-party portion is tariffed and regulated. Based on the category of vehicle, there could be an increase in third-party premium,” says Sanjay Datta, chief-underwriting and claims, ICICI Lombard General Insurance.
 
All vehicles plying on the road need to be insured to cover any third-party liability, according to the Motor Vehicles Act. “Most accidents result in damage to the vehicle. Only a few result in third-party injuries. Hence, insurance companies incur more costs in settling claims for damages to the vehicle compared to third-party liability. Today also, in case of private cars and two-wheelers, the third party premium is far lower than the premium for own damage,” says S Thirunavukarasu, country head, underwriting and claims (motor), Royal Sundaram General Insurance.
 
Third party insurance is loss-making for the industry. “The correction in premium suggested should be seen in that context. Given that all important factors have been considered while arriving at the proposed rates, there is hardly any margin. Hence the final premium rates may not vary much from the proposed rates,” says M Ravichandran, president, Tata AIG General Insurance.
 
Impact on premiums
 
The current proportion of third-party premium out of total premium is 30 per cent in case of four-wheelers above 1,000cc. In case of two-wheelers, it is around 50 per cent. “If these guidelines are notified, for four-wheelers above 1,000cc, the overall premium may increase by 15 per cent, while for two-wheelers, with engine capacity more than 150cc, the hike may be 20-25 per cent,” says Puneet Sahni, head-product development, SBI General Insurance.
 
Stick to comprehensive cover
 
Despite the expected rise in premium, vehicle owners should not opt only for third-party cover just to skimp on costs. A comprehensive car insurance covers loss  to the vehicle due to accident,  burglary, theft, riot, strike, fire explosion, self-ignition, natural calamities, etc. It also offers personal accident cover for the car owner or driver. “Buy comprehensive cover as it will cover damage to the vehicle along with any third-party liability,” says Parag Gupta, chief underwriting officer, Bharti AXA General Insurance.
 
As vehicle density increases, constricting road networks, more cars are expected to meet with accidents, causing huge losses to vehicle owners. “We advocate third party insurance for vehicles that are very old and where the cost of vehicle is very low,” says Thurunavukarasu.
 
Another reason to buy a comprehensive cover is that all the available add-ons are part of own damage cover, points out Ravichandran. Comprehensive cover is also recommended for owners who use their vehicles regularly. “The probability of accident is higher if the vehicle is driven more,” says Jaideep Devare, managing director, Mahindra Insurance Brokers.