The decision, Insurance Regulatory and Development Authority (IRDAI) said, was made after the examination of existing long-term package covers currently on offer. Higher insurance costs were one of the reasons blamed for lower auto sales, which dived across all modes of transport much before India had shuttered its cities to prevent the spread of the coronavirus.
“After a careful examination of long-term covers… and concerns relating to its implementation coming to light, the authority has decided to withdraw the long-term package covers offered for three and five years for new cars and two-wheelers, respectively, with effect from August 1,” IRDAI said in an order to general insurers.
Besides price discovery challenges for insurers due to lack of actuarial models, the optional cover was also being forced upon customers on purchase of new vehicles, thus jacking up the prices, the regulator said. “The possibility of forced selling due to financial interest is high/being linked to loan is high,” IRDAI said. “In case of deficiency in services, the policyholder would be saddled with a long-term product with no flexibility to change option.”
The own-damage component typically covers any damage caused to vehicle due to an accident or natural calamity, whereas the third-party cover covers liability for injuries and damages to others.
Insurers can now sell only one-year own-damage cover along with the mandatory three-year or five-year third-party cover, as opposed to a single long-term package cover.Insurance companies started offering these packaged long-term policies on an optional basis from September 2018 following a Supreme Court directive. This was done to ensure increased penetration of motor insurance. Only 6 million of the 18 million vehicles were covered by insurance when the policy was first introduced in 2018. As per the existing regulations, a customer had the option to purchase either a single long-term third-party and own-damage cover which covered the vehicle for three or five years, or buy a bundled product with a three- or five-year third party cover, along with a one-year own damage policy.