Insurance Articles

Detariffing and your motor insurance premium

Detariffing is finally a reality .Here’s the likely impact on your motor insurance premiums.

Till last year, there was little to distinguish between auto insurance plans offered by various insurers. That’s because policies were classified by the Insurance Regulatory and Development Authority (IRDA) as ‘tariff’ policies, on which the regulator set the minimum premium chargeable and hence defined the nature of the policy offerings. Since the 1st of January 2007, detariffing has been introduced by IRDA. Under this regime, general insurance companies are free to set differentiated premiums for most of their products. So, now instead of one size fits all policies, companies can charge different premiums to different consumers, based on their own business analysis and estimation of the consumer’s risk profile. The area which is likely to see the most action is motor insurance which accounts for close to 50 per cent of the general insurance business.

Motor Insurance covers the vehicle and the vehicle owners’ liability towards third parties (or accident victims) and is mandatory. Infact, without third-party liability cover, you cannot get the car onto the road. As per the detariffing rules, IRDA has allowed insurers to marginally increase the rates for third-party insurance — an unprofitable cover. At the same time, it has freed pricing on motor vehicle insurance. In the detariffed scenario, insurance companies will arrive at premiums based on their assessment of risk on a case-to-case basis. As insurance companies are not allowed to vary the scope of cover with respect to the products on offer, this shall ensure a continued consistency in coverage given to the insured. Combined with an appropriate risk premium, the customers with a good track record will be the biggest gainers. In addition, insurers will focus on customer service as a key differentiator.

One area which the IRDA was concerned about while undertaking this initiative was rampant undercutting .To pre-empt this possibility, the IRDA has allowed insurers to reduce the tariff only up to 10 per cent of the current tariff. Also, they are not allowed to change the tariffs for the next six months. Moreover, rating in the detariffed scenario will be done as per merits of the risk. Hence, bad risks cannot be cross subsidized by the good ones. Here’s a look at the factors which will decide your premiums on comprehensive motor cover:

1) The brand and the model of a car will decide the insurance premium that its owner has to pay. There will be factors that work on a portfolio level which are related to the vehicle model (serviceability, ease in repairs, availability of spare parts, etc.) and location.

2) Parameters like the date of purchase, number of accidents, driver-driven or owner driven car will also be among the factors that will determine the premium.

3) A person who has invested in safety features, maintains the vehicles well, has a favourable claim profile, etc. would stand to benefit. All-in-all, customers with a good risk profile would enjoy lower premiums.

4) Models from companies which have a poor distribution network and spare parts with high cost will attract higher premiums.

5) The cost of third party compulsory insurance cover is set to increase by 150 per cent. This will mostly affect commercial vehicles since most private vehicle owners prefer a comprehensive cover.

For 2007, policy wordings aren’t going to change and hence only the rating will affect the premium. In 2008, the condition of the vehicle, its age, maintenance and the insured’s claims history will have a big impact on the rates. When this happens motor vehicle owners can expect customized covers suited to their exact requirements. Moreover, there will be no compulsion for them to pay for cover that they do not require. Customers should however realize that the best rates are not necessarily the lowest rates. In a fully de-tariffed 2008, where a low rate may be offset by a reduced coverage, it becomes imperative that the insurance contract is read and understood fully before being entered into. Hence , in order to derive maximum efficiencies, it is critical that you understand the product that you are purchasing very well.

Take-home - Globally, it's the advent of insurance brokers that marks the complete opening up of the insurance industry. The Indian insurance industry has only recently crossed that milestone, although insurance broking hasn’t fully taken off yet. Unlike agents, who peddle only one insurer’s products, a broker will offer products across insurers, and will be equipped even to get insurers to tailor products to your specific needs. For instance, if you’re a professional who drives from home to work everyday vis-à-vis a regular outstation driver, your policy and hence premium will be entirely different. So , make sure you have a good motor-insurance broker in order to get the best deal.