The Insurance Regulatory and Development Authority of India (IRDAI) recently decided to withdraw long-term motor insurance package policies. While this decision has taken effect from 1st August, 2020, the move is touted to impact new vehicle buyers positively. If you’re planning to buy a new car or bike soon, here’s what you need to know.
The background
A motor insurance package policy comes with two components – third party (TP) legal liability cover and own damage (OD) cover. The TP cover is mandatory, and it protects you against third party injury and property damage. On the other hand, the OD cover is optional, and it takes care of damages to your own vehicle. The OD cover is not mandatory by law in India, but it safeguards the car/bike owners from losses due to theft, fire, natural calamities and more. You can also opt for add-on covers over and above the TP and OD components of your policy.
Insurance companies provided three-year package polices for new cars and five-year package polices in case of new two-wheelers. Vehicle owners could either opt for a long-term package of TP + OD, or a long term TP + 1 year OD bundled cover. The long-term policy, first introduced in September 2018, came with the benefits of no renewals, no premium changes and no inspection for three years. So why did IRDAI decide to withdraw this plan?
Concerns over long term policy
While a long-term policy secured owners against losses for three or five years in one go, certain concerns were raised to the IRDAI over its implementation. According to a circular issued by the authority, insurers faced challenges in the actuarial pricing for the long term OD cover. The package policy faced setbacks in distribution due to a matter of affordability among vehicle owners. IRDAI also noted that there was a possibility of forced selling by financial institutions, to a major chunk of customers who were taking vehicles on loan.
Moreover, the structure for No Claim Bonus (NCB), which is provided on renewal, was not uniform across insurers, causing dissatisfaction in policyholders. They also saw no flexibility to change their plan before 3 years, in case they were unhappy with the insurer’s service.
The decision
To combat all the above challenges, namely lack of uniformity, customer confusion and dissatisfaction, the regulator has decided to do away with the long-term package policy. From 1st August 2020, Indian motor insurance companies can only sell a 1-year OD cover with their long-term TP plan for three years/five years. Customers can go for a policy that covers their mandatory insurance needs for a longer term, and renew their OD cover annually.
The impact
The decision will have a positive impact on car and bike owners. Firstly, the gross premium that’s underwritten is set to decrease, as the number of policies goes down. The on-road vehicle prices may also come down, with the long-term insurance price out of the equation. This may encourage sales, which is essential right now, considering the falling automobile sales during the lockdown. Apart from the cost advantage, policyholders will now have the flexibility of switching providers at the time of renewal, and they will be able to get their NCB every year without any confusion.
If you’ve already purchased a long-term car or bike insurance package policy, there’s no need to worry about the new decision. Your policy is still valid, and you can renew it once the three or five-year term is up. You’ll receive your accrued NCB on the OD cover once the policy term is completed. This decision will impact only those purchasing a new policy for their four-wheelers or two-wheelers.
source: https://www.icicilombard.com/blog/car-insurance/car/irdai-withdraws-long-term-package-policy-how-will-it-impact-new-vehicle-owners
