Motor Insurance: Long-term Third-Party, Own Damage motor insurance cover proposed: Know proposed features, price, premium

The Insurance Regulatory and Development Authority of India (IRDAI) has proposed to introduce long-term motor insurance products comprising Third Party insurance and Own Damage cover.

In August 2020, the regulator had withdrawn the mandatory purchase of long-term comprehensive insurance policies having combined features covering Own Damage and Third-party liability at the time of purchasing a new vehicle. However, it allowed the purchase of only long-term Third Party policies at the time of purchase of a new vehicle while own damage insurance could be taken only for one year.

However, as per the new draft proposal by IRDAI, the flexibility of buying long-term policies with combined as well as standalone coverage will be given to policyholders. While private cars will get long-term coverage of three years, this period will be five years in the case of two wheelers.

What IRDAI has proposed
In its exposure draft released on December 7, 2022 IRDAI gave the following proposals.

In order to allow the policyholders a wider choice, it is proposed to permit all general Insurers to offer long-term Motor Insurance policies as specified hereunder.

a) 3-year in respect of private cars co-terminus with motor Third Party Liability cover.

b) 5-year in respect of two-Wheelers co-terminus with motor Third Party Liability cover.
c) Long-term Own Damage cover in case of renewal of standalone Own Damage policies such that the long-term Own Damage cover is co-terminus with the motor Third Party Liability cover.
d) 3-year in respect of erstwhile Indian Motor Tariff Class D (Miscellaneous and Special Types of Vehicles hereafter referred as Class D Vehicles) co-terminus with motor Third Party Liability cover.
e) Motor add-ons co-terminus with the Motor Own Damage cover in respect of Private Car, Two-wheelers, and Class D vehicles

The Insured Declared Value (IDV) agreed to by the policyholder, the premium and the add-ons applicable for each year will be mentioned in the policy schedule. The depreciation rate to apply on the IDV agreed must not exceed 10 per cent per annum during the policy period.

Currently, new cars can get Third Party cover for three years and two-wheelers are issued TP cover for five years. Own Damage cover for both the car and two-wheelers is available for one year.

How much will the long-term motor cover cost?
The insurance regulator has specified how insurance companies should decide the price of long-term motor insurance products. “Pricing of long-term policies is to be made based on sound actuarial principles considering all the relevant aspects of rating including claims experience, lower anti-selection, reduced policy administration and acquisition costs given higher renewal rates, long-term discount, expected NCB level by the end of the policy period and applicable government taxes, etc,” IRDAI said in the draft. Moreover, the pricing of add-ons and optional covers may also consider the cost efficiencies of policy administration.

Premium for long-term motor covers
Policyholders need to pay the premium for the entire term of the policy coverage at the time of purchasing the policy. The premium for the year will be considered as ‘income’ while the remaining amount will be recognised as ‘premium deposit’ or ‘advance premium’.

Cancellation of long-term motor insurance
All long-term policies would have standard conditions of cancellation or refund of premium, according to the draft exposure.

Policyholders will have a free-look period of 30 days from the date of inception of the policy. In the case of the free-look cancellation, the policyholders are entitled to a refund of the premium on a pro-rata basis.

The long-term motor Own Damage policy can be cancelled during the tenure of the policy either by a policyholder or by the insurer by giving the notice of cancellation, IRDAI said. The refund of the premium in a such instance would be as under:

a) Future-year premiums will be refunded in full.
b) For the policy year in which the policy is cancelled.
1) Where no claims are reported during the year: Refund of pro-rata premium pertaining to the year of cancellation
2) Where claims are reported during the year – No refund of premium
c) GST and other government taxes – refund to the extent permissible by the concerned authorities.

Cancellation in respect of long-term motor Third Party Liability policy would be as per extant guidelines, the regulator said.

“The option of providing a free look period is also customer friendly and beneficial. Simultaneously the draft regulation also talks about refund of premium in case of cancellation of long term policy where next yr premium would be refunded in full and running year’s premium would be refunded pro rata in case there is no claim. This too offers flexibility to customers,” said Ashwini Dubey, Head – Motor Insurance Renewals,

No-claim Bonus
The existing No-claim Bonus formula specified for one-year Own Damage policies will also be applicable for long-term policies. “The No-claim Bonus applicable at the end of the policy tenure in case of long-term policies would be same as that would have been earned if such policies were renewed annually,” IRDAI said. “In case of long-term standalone Own Damage policies which are issued to be co-terminus with Motor Third Party Liability cover, nine-month of policy tenure can be considered as a full year for recognition of NCB during the year,” the regulator added.

“Some of the common benefits of having such a multi-year plan include elimination of yearly renewals and avoiding the risk of forgetting to renew the policy on time. In addition to this, other perks include no effect on premium rates for three years, accumulation of comparatively higher No Claim Bonus for non claimed years, discounts on premiums, and not having the need to examine the condition of the car during every renewal year,” said Rakesh Goyal, Director Probus Insurance Broker.

The regulator has asked all stakeholders to share their comments on the draft proposal by December 22, 2022.

“IRDAI has proposed to introduce long-term policies for its Own Damage in addition to the currently available long-term third-party policy. It will give an option to the customers to buy insurance for a multi-year in one transaction. New Vehicle owners were misguided by the dealers to buy long-term Own damage & Third party policy, thus the on-road price of the vehicle went up for the owners. Most of the new vehicle owners are unaware of the insurance requirements and thus get locked with the dealers for three to five years,” said Animesh Das, Senior Director- Motor Underwriting at ACKO.

“The proposal drafted by the IRDAI with respect to long term motor insurance policy will have a positive impact on the four-wheeler and two-wheeler owners. Certain amendments like these, are needed to help increase in the penetration of motor insurance in the smaller markets,” said Indraneel Chatterjee – Co Founder – RenewBuy.

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