Third-party motor insurance premiums fixed for new financial year

April 3, 2013

(Any opinions expressed here are those of the author and not of Reuters)

A motor insurance policy consists broadly of two parts — third-party cover, which is regulated; and an ‘own damage’ cover, the premium for which is left to market dynamics.

The premium for ‘own damage’ cover, which forms the larger chunk of the insurance premium, is based on risk and competitive pressures.

The third-party cover, which is compulsory, covers the risk for third parties in situations like damage caused to a person who was standing by the road and was injured or killed by an accident involving an insured vehicle, or damage caused to a wall after a vehicle crashed into it. The claim amount in this case can be unlimited and it is a sticky subject.

The Insurance Regulatory and Development Authority (IRDA) decides the premium that can be charged for different types of motor vehicles using elements like cubic capacity, types of activities being undertaken and tonnage as primary segregating tools.

Then, based on the previous year’s claim expenses and adjusting for inflation, the coming year’s premium is decided.

Last year, the insurance regulator increased third-party motor insurance rates and it was taken to court by an affected party. The court upheld IRDA’s order but also ordered the regulator to declare data which is up for revision and invite objections before deciding on new premiums.

So this year, it invited objections and received 67 responses from various stakeholders.

See the chart below for the new third-party insurance premiums fixed by IRDA.

The ‘Based on Calculations’ column shows the premium that would have been applied purely based on a mathematical approach. The ‘Final’ column displays the final rates after inviting objections from different stakeholders.

In the private car section, you will observe the upper-middle-class sedans subsidizing the sub 1000 cc and greater than 1500 cc cars.

Among the commercial vehicles, there seems to be heavy cross-subsidizing. Some sections – 12,000 kg to 20,000 kg section – are charged substantially lower premiums than what seems ideal. The need to increase premiums gradually or insufficient data could be the reason for some of these adjustments.

Overall, these are steps in the right direction, with increasing risk-based pricing being put in place and third-party premiums changing every year.

With more accurate data collection and reporting, the pricing mechanism will only get better and we might even see a reduction in premiums in some categories.

In the case of goods carriers, which enjoy subsidized diesel and subsidized insurance premiums, it doesn’t get much better than this.

For more articles by Deepak Yohannan, please visit

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