IRDAI has announced that the long-term motor insurance package policy will be withdrawn starting 1 August 2020. This is expected to bring down on-road prices of cars and two-wheelers. Before we discuss how, let us look at what the decision is about.
Motor vehicle insurance has two prominent components:
This provides financial protection from any damages or losses caused to your car. These damage/losses could result from:
This type of cover protects you against legal liability that arises from any accidents that involve your vehicle that resulted in injury or damage to a third-party person or property. The compensation from third party car insurance is provided only in the case of:
Out of these, the third-party liability cover is mandatory for all motor vehicles plying on public roads in India. Own damage cover is optional.
Considering the low penetration of motor vehicle insurance in India, the honourable Supreme Court ruled that starting September 2018 purchasing long-term third-party insurance would be mandatory for all new vehicles.
The policy period for these policies was set as three years for new cars and five years for new two-wheelers.
Following the judgement, IRDAI recommended that every insurer offer three types of third-party insurance policies:
1. Long-term third-party liability-only policy
2. Long-term bundled policy – which offered a long-term liability cover and a one-year own-damage cover
3. Long-term package policy – which offered both a long-term liability cover and a long-term own-damage cover (This offering is withdrawn from 01st August, above 2 are still valid)
After offering the long-term package policy for motor vehicles for about two years, IRDAI observed a few issues with it:
1. The distribution of long-term packaged policies was challenging as the cost of the policy is high for most vehicle buyers.
2. Insurers found it challenging to price it correctly as the new information of the driver's behaviour can only be factored in after the term of the policy expired.
3. The policyholders felt that they could not switch insurers, even if they were unhappy with their current insurer. They were locked-in for the three- or five-year period.
4. There was a high chance of forced selling by financial intermediaries. Most motor vehicles in India are sold through financing, and it was observed that the loan providers could link a long-term package policy with their loans.
Considering all these factors, IRDAI has decided to withdraw the long-term package policy for motor vehicle insurance.
The withdrawal of the long-term package policy is being seen as a positive move for the consumers. The immediate impact includes:
1. It brings down the cost of first-year insurance for new car/two-wheeler buyers. This means the on-road price of the vehicle also comes down, resulting in lower loan amount requirement and therefore lower EMI payments over the loan term. This is arguably the biggest positive for consumers out of this change.
2. If the policyholder is not happy with their current insurer, he can choose to renew the own-damage cover with another insurer at the end of the one-year policy period.
3. The premium for the second year would be decided by the insurer based on their underwriting principles. This adds a little uncertainty for the policyholder who could have got a lower premium when buying a long-term cover.
4. The policyholder will have an option to choose different add on covers as per his need in subsequent years of the vehicle purchase.
If you have already purchased a long-term package policy for your vehicle, it will continue to be in force till the end of the term. You would also be eligible for your accumulated No Claim Bonus when you look to renew the own-damage cover at the end of the policy period.
Remember that third-party liability insurance is not just a must-have to provide you financial protection from any liabilities arising out of an accident involving your vehicle but is also mandatory for all vehicles plying on public roads in India. Ensure that you purchase a policy as soon as you buy a new ride for yourself and renew it on time for continuous coverage. Even a day without an insurance cover can prove costly.
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