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Third party premium for motor insurance increased

By Deepak Yohannan
April 16, 2014

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

It is compulsory for every vehicle in India to have a third party insurance, which covers risks involving damage or loss to others caused by the vehicle you drive.

Since it is mandatory, the pricing has traditionally been administered by the insurance regulator, IRDA. With the price controlled and risk unlimited, the portfolio is bound to look messy.

The regulator currently revisits the pricing once a year and ends up increasing the premium based on a predetermined formula. To see the current increase for two wheelers and cars, see the table below.

Type of Vehicle New 3rd Party Premium (Rs) Increase (Rs)
 
Private Cars
Not exceeding 1000 cc 1129 188
1000 to 1500 cc 1332 222
Greater than 1500 cc 4109 685
Two Wheelers    
Not exceeding 75 cc 455 41
75 to 150 cc 464 42
150 to 350 cc 462 42
Greater than 350 cc 884 80

Premiums for all other vehicles, including commercial ones, have also been revised.

The problem with such administered pricing is that companies know the portfolio will be bleed and hence, typically avoid taking risks as much as possible. There is also a lack of awareness and interest especially among owners of two-wheelers, who end up not insuring their vehicle every year.

This creates a huge risk when such vehicles ply on the road. It also creates a sort of negative selection where only those vehicles high chance of claims end up paying for third party insurance. This results in the premium collected not being sufficient for the claims which appear in this category.

IRDA in principle wants to de-tariff third party premium, which means letting insurance companies decide on the price – with maybe an upper cap in place.

The presence of a large number of insurance companies will ensure that there is enough competition and pricing should more or less be risk-based without customers being taken for a ride.

The regulator also has plans to increase the tenure of third party policy to three or five years (currently it has to be renewed every year). This is a smart way to tackle the problem of lack of renewal. A large number of customers who don’t necessarily want to be on the wrong side of the law don’t renew their third party insurance due to sheer lethargy or lack of awareness and understanding of the risks.

All the steps mentioned above point to the right direction. A badly maintained old vehicle poses a much higher risk on the road than a new, well maintained one. Unfortunately, the chances of the former not having third party insurance are much higher. This need to be fixed, and the sooner the better.

(For more articles by Deepak Yohannan, visit MyInsuranceClub.com or tweet him @dyohanna)

 

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