Irdai proposes to make calculation of motor cover simpler, more transparent

Customers will not have to buy add-ons like invoice cover in the new regime

Vehicle owners have reason to smile as a working group of the insurance regulator has proposed a new age-based depreciation in value of vehicles for calculating the sum insured of their policies. This is expected to make the calculation of sum insured simpler, and lead to more transparent coverage that is in line with expectations. 

Two options have been proposed. The first one (see table) will calculate the sum insured of your vehicle by taking the current listed price of the car, including the value of all accessories fitted by the manufacturer, and adjusting by age-wise depreciation. The sum insured for a year-old car will be 95 per cent of the manufacturer's listed price. As the vehicle gets older, the sum insured keeps decreasing. For a car that is older than seven years, your insurer and you can fix the sum insured mutually. 

In the second option, no depreciation will apply for cars up to three years old. The sum insured will be computed by taking the current day on-road price, including invoice value, road tax, registration charges, and value of all the accessories fitted by the manufacturer. For calculating the sum insured of cars in their fourth year, 40 per cent depreciation will apply; 50 per cent for cars in their fifth year, and so on. For those beyond their 7th year, the sum insured will be for a mutually agreed value between insurer and insured.

"Age-based depreciation will make the sum insured more in line with customer expectations. The sum insured will remain at invoice value for initial three years and then get depreciated based on the invoice value and not on ex-showroom price," says Sajja Praveen Chowdary, business head, motor insurance, Policybazaar.com. "This will ensure that customer expectation is met by the basic coverage itself and he does not have to buy add-ons like invoice cover, which not everyone is aware of," he adds. 

According to Arun Singh Bhadauria, head-motor insurance, Universal Sompo General Insurance," For new vehicles now the sum insured should be the entire amount paid to bring the car on the road, i.e., including ex-showroom price, cost of accessories, registration fee, road taxes, etc while earlier the sum insured was only the ex-showroom price. The depreciation in private cars and two-wheelers has been increased to 65 per cent from 50 per cent, and in a commercial vehicle, it is proposed to increase to 75 per cent from 50 per cent".

For two-wheelers, sum insured will be computed by taking the current-day listed price of the vehicle, including the value of accessories fitted thereon by the manufacturer, and adjusted by age-wise depreciation. For six-month-old two-wheelers, the sum will be 95 per cent of the listed price.

For other classes of vehicles, the sum insured will be computed by considering the on-road price of the car at the time of purchase, including invoice value, road tax, and the cost of all accessories fitted by the insured adjusted for depreciation. For partial loss claims, too, age-wise depreciation has been recommended, wherein if the vehicle is less than a year old, depreciation will be 10 per cent.

Moreover, the draft guidelines have proposed to club depreciation of different parts into a single category, and a standard depreciation table has been provided based on age. "Earlier, there were four categories of parts, and depreciation was different for each category. Customers were not able to understand why a different amount had to be borne on different categories. Giving a standard table gives confidence to the customer,” says Chowdary.