Money Money Money: Here's what experts have to say about the new motor insurance policy

Q: This personal accident change and the sudden increase from Rs 1-2 lakh to Rs 15 lakh, it's quite a lot suddenly to come through. Your first reactions to this?

Jain: It's quite contextual to really say that this is increased significantly. We can say almost 15 times in certain categories. But, this is happening after good 15-16 years. We all understand a lakh of rupee in today’s environment is also becoming quite insignificant. So, if the insurance does stand up to the needs of people, it is better be relevant to their needs. Often it's associated with what the family needs and even paying for medical expenses or maybe some kind of financial planning in case of death. If the amount is insignificant, it's as good as saying that you are on your own. It's just bit unfortunate that we don’t revise these limits time to time. So, whenever it happens, it feels like a bit significant.

Rao: This provision is applicable for every policies whether it's for a new vehicle or an old vehicle. For the existing once, it will be applicable from the renewal, whenever the renewal happens. Interestingly, there is some background to this.

There was a Madras High Court order recently, which said that the existing provision for Rs 1 lakh for two-wheelers and Rs 2 lakh for owner driver personal accident cover is very inadequate and it should be increased to Rs 15 lakh.

That is something, which prompted Insurance Regulatory and Development Authority (IRDA) to look at this going from Rs 1 lakh for two-wheelers and Rs 2 lakh for four-wheelers to straight away to Rs 15 lakh. As Rakesh Jain mentioned, it's a good amount to meet some of the exigencies for the family and that way, it would be helpful for the family.

Jain: Yes, but it's at the same rate what existed even in 2002. So, even in 2002, and 2018 onwards, people were still paying Rs 50 per lakh and it's still meant to be Rs 50 per lakh. Of course, multiply to a minimum of Rs 15 lakh.

Mathur: The policy buyers today are of course, I wouldn’t use the word miff, but they are seeing that the premium rate has increased by about Rs 750, the increase is by Rs 650 for a motor insurance buyer. But having said that, on the overall piece, if you look at on an average, the rate of car that you drive in today, let us say, about Rs 8,000 and this is what goes out of the pocket. So, compared to that, let us say about 8-10 percent increase. But, given the benefits, you see here’s is a direct benefit that the customers are seeing.

They are seeing that instead of what was a paltry sum of Rs 2 lakh, they are getting Rs 15 lakh, which makes far more sense and if you look at it. What the high court ruling says that what has come out now is that for two-wheeler customers and for motor customers, the cover is the same Rs 15 lakh, which is bit unfair the way you would say that if a two-wheeler goes into a damage, then the personal accident cover is only Rs 1 lakh, whereas if it's the car, it's Rs 2 lakh. It is the same expenditure required for a person is the same. In fact, the severity of the accident, the chances are higher in two-wheeler then in motor.

Customers, when they are told that this is for a personal accident cover, which is something they would receive in case of an accident, they are warming up to the idea. Like we discussed few minutes back, it was long coming and I am glad that has happened now, because genuine Rs 1-2 lakh are just not sufficient. So, customers are taking it quite well. We have not seen customers going back or feeling despondent over the increase in premiums and that was the only one that gets affected. So, all-in-all, I think it's a good move and customers will appreciate it as they are told about the benefits.

Jain: This is a part of third party pricing and obviously, third party pricing gets re-visited every year by IRDA and obviously, when they look at the price and the rates, they compare it with the experience of the claims. Personal accidents one year rate is quite frozen, because that is what is mandated. Having said that, I understand IRDA says that for the long-term policies like the three year or the five year depending on the two-wheeler or four-wheeler, the companies are at liberty to discount it a bit based on their overall approach for long-term policy.

So, my initial reaction is as we are in the midst of doing this in the last few days and the markets are likely to offer a long-term discount to people, who take a three year or five year product and pass on the benefits of the float or the savings in operating cost back to the customer. Which should be a sufficient incentive for him to really compare between one year and a five year depending on this.

Rao: As Rakesh was mentioning, it may not be straight away multiplication, it may not be Rs 750 multiplied by 5, there could be some discount. If you consider some discount at premium, for a two wheeler, it could be a significant increase in premium, but we also need to look at the risk involved.

Two wheelers typically, the owner who is the driver, meeting with an accident is much higher than a four wheeler. So, the benefit of this coverage is something, which family will look forward to. If something unfortunate happens, it gives an immediate compensation and personal accident doesn’t take too much of time for settlement. In case of third party, you have to go through the legal processes for settlement, but in a personal accident cover, the settlement can be very fast.

Rao: As per the IRDA directive, it has to be an actuarial pricing. So, most of the companies are working out the pricing. I would expect at least somewhere between 10-20 percent discounts, which could be expected, when you are buying a third party policy, which will include personal accident cover.

Jain: The two wheeler policy before both the amendments – the third party pricing was about Rs 600-700 per annum. Now, there are two things, which have happened – there is a 5 year policy as well as there is a personal accident cover of Rs 750 per year. So, from about Rs 700 kind of an outflow, if you are on an annual policy, which will still be applicable for the old two wheelers, my sense is that it will now be like Rs 1,300-1,400 for a one year policy. Maybe for a 5 year policy discounted to a long term discount, may be it's about Rs 5,000. So, if you see from the cost of the vehicle perspective, may be if it's Rs 1 lakh for two wheelers, it's going to be like 3-4 percent incremental for a span of 5 years.

Mathur: What has happened with both these rulings is that the upfront cost of insurance become expensive. The way I look at it, the insurance purchase itself is now a decision coupled with the car purchase. Today, when you go hunting for a car, you look at the pricing depending on which segment you are buying. But if you look at the higher segments or any car, which is above 1500cc, then you are talking about the cost of insurance as it's 3 years and is anywhere between Rs 24,000 to Rs 30,000 and that itself is a big amount for the customer to bear. This I am talking only about the third party coverage. Typically, a new car buyer will also buy a comprehensive policy with zero depreciation and with engine protector, that insurance purchase is becoming a decision itself as it's taking the cars cost up by anywhere between 3-6 percent. We have car finance available and that has come into being over the last 15 years and I think, insurance is moving into that level, where it also needs to be financed.

That insurance decision will also be taken and with the discounts that will come in for the long term policy, which might range anywhere between 10-20 percent of the exact mathematics that comes multiplied by 3 would be welcome. Somewhere the customers will have to find avenues of getting this whole insurance premium financed through either through their bank finance or on their self. However, it's going to change the way we buy cars.

There is a nominee in the policy, when you take the policy, you have to mention who is your nominee. So, the nominee gets this benefit.

Jain: It goes little bit on the disability side. So, if you have a loss of two limbs or your eyesight or a combination of one limb, one eyesight, then you get 100 percent of the sum insured. In case, there is a permanent total disability, then also you may get. So structurally, it takes care of your medical expenses also in terms of disability.

Jain: I would not disagree. This is an easier way to claim and it's like a benefit. Many of the health policies come like you spend the money to get it. To many of the rehab process and all go very longer, which may or may not get covered in health and personal accident policy can even be taken by people with pre-existing diseases as it does not distinguish between the health of a person or no. So, it's truly incidental and I think it comes extremely cheap. It comes at the rate, which was set 15-16 years back and I don’t think any customer should feel aggrieved by this cover as long as they clearly see this as a risk.

Rao: No difference. It's basically an average rate applied across.

If you see over there, the rate for two-wheelers are the highest, unlike in this case, where it has been like Rs 50 per lakh, over there it's actually Rs 50 for private cars, Rs 60 for commercial vehicles and Rs 70 for two-wheelers. So, even if you see from that aspect, this rate is much finer.

Jain: It's in multiples of Rs 10,000 and can be opted in by the customers as much as you want, but the rate is frozen over there. It's a bit of a dichotomy of law there.

Jain: The owner or driver, if you go by this strict sense of interpretation can also be a co-passenger. It's just that when you deal with third party, the third party excluded first party, which is the insured, and the second party was obviously the insurance companies. So, the first party, while you have an accident and you realise if you knock off somebody else, he gets Rs 5-20 lakh. But if there is an unfortunate incident and the first party which is the insured – he ends up maybe getting a lakh or two, so that is getting right sized. If you see from the rate, the amount is just bringing it to the level, which is expect it to be.

Mathur: Today, the financing options are through unsecured loans only. But I think within the next 30-60 days, you will find specifically options for insurance that you were opting for higher covers, otherwise what a rate increase generally does is it takes away the benefits when, the purchase are happening.

So, I would anticipate some of these changes to take place perhaps from next quarter onwards and one of the big shift, which is logically going to happen, when you have a multiyear third-party insurance (TP) is that you have the own damage portion being left aside that gets sold separately and at least in the renewable process, people will only be doing the own damage.

Jain: The way I look at this thing is, when you do your pricing for three-five years, you take into account the no-claim bonus like a portfolio and pass it on to the end customers. At the same time, we will also look at what kind of float income you would generate. You may also look at the operating expenses, which you may save. There is also an adverse thing, which needs to be factored in, which is inflation as the price today will not hold true for all the claims, which are anticipated. So that is the adverse thing, which you need to take and then you need to see customers and how they stay with you over a period of time. So, there are various factors which will go towards this.

Mathur: For the end consumer, I would also like to highlight the point that the purchase might be little different from what it's today. However, let me pick out the rates for a car, which is less than 1,000 cc. Today it’s about Rs 1,850 and with the new accident cover, it will be about Rs 2,600. So, what you were spending Rs 2,600 on today, will become about Rs 700 odd or so. If you make in a discount on just the TP, I would say that it could be anywhere in the range of Rs 7,400-7,500 only for the TP cover. For broad mathematics, that would be about half the cost of total car insurance on comprehensive basis. So, you are looking at about Rs 15,000 for a car less than 1,000 cc. However, what will happen is that this won’t be 15, it will actually end up being 17. If you buy a third-party cover for three years and you are renewing your own damage every year, what might happen is you paid for your TP earlier and then the car comes for renewal and then you are looking at Rs 7,000-8,000 amount you might just continue with more add-ons as your affordability over the succeeding year might be higher and that is what we see a lot of cover. So, for those who bought protection plans, they are able to upgrade higher levels as succeeding year go on. I am thinking this will go to about Rs 17,000-18,000 for a car about 1,000 cc or so.

Rao: TP cover is something, which is for the benefit of the customers and somebody buying either a four-wheeler or a two-wheeler, there is no choice since it's mandatory. But they should consider that this is something, which is beneficial to them.

Jain: The only distinguishing factors is there is an upfront cost and there is a long-term price. People who have money, will actually save by buying long-term at a fixed price, they do not have to go through the inflation and the change in price, which used to happen otherwise and to my mind that is a great value proposition for somebody, who can really put that kind of money.