Car Insurance - Premium calculation and proposed changes

Car insurance in India is an insurance which every vehicle owner must mandatorily avail if they possess a vehicle. However many people actually don’t bother to wonder how these values are calculated. Although this write-up is about the recent proposed changes by Insurance Regulatory and Development Authority (IRDA) of India, the article would serve more sense if some preliminary information of car insurance is provided. For those who are already well versed with the car insurance premium calculation, please feel free to skip to the last paragraph.

To understand how car insurance premium is calculated we need to understand the factors involved in deciding the premium of the insurance policy. Apart from the car, the city of registration also accounts to variations in the insurance premium. Accordingly there are specific zones and corresponding rate factor for the insurance premium. The different zones are  

Zone-A:  Ahmadabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi and Pune

Zone-B:  Rest of India

The insurance premium charged depends upon the city of registration, irrespective of the place where it is used or where the insurance in renewed.

The basic premium is calculated as per the Indian Motor Tariff. It varies from case to case.

It depends primarily on the following factors:

1. Cubic Capacity of vehicle – Premium increases with the increase in the vehicle CC

2. Age of vehicle – Coverage (or sum insured) decreases with the age of the vehicle

3. Period of coverage – Premium increases proportionately with period of coverage

4. Discounts/ loadings – Premium decreases if discounts are availed.

5. IDV (Insured's Declared Value).

The first four bullets have a somewhat direct proportionality with the insurance cover or premium charges. The IDV is a parameter which is equivalent to the sum insured of the policy. It is calculated taking into account various factors involved in evaluating the car. The age of the car, wear and tear of the car, history of the car etc. are some of the factors involved in determining the IDV. There are different depreciation norms followed to allow an unbiased evaluation of the car depreciation.

The table below would help the reader understand how the depreciation of a car is calculated.
TABLE 1

PARTS OF VEHICLE	% OF DEPRECIATION
1. For all rubber/ nylon/ plastic parts, tyres and tubes, batteries and air bags	50%
2. For fibre glass components	30%
3. For all parts made of glass	Nil

For all other parts including wooden parts, the following depreciation rates apply.
TABLE 2

AGE OF VEHICLE	% OF DEPRECIATION
Not exceeding 6 months	Nil
Exceeding 6 months but not exceeding 1 year	5%
Exceeding 1 year but not exceeding 2 years	10%
Exceeding 2 years but not exceeding 3 years	15%
Exceeding 3 years but not exceeding 4 years	25%
Exceeding 4 years but not exceeding 5 years	35%
Exceeding 5 years but not exceeding 10 years	40%
Exceeding 10 years	50%

Now a certain change is being introduced in table 1. Paint items are also proposed to be added to this list of items which have depreciation rates. The authority said that paint will be included in the category of 'rubber, nylon/plastic parts, tyres and tubes, batteries and air bags' which presently attract 50 per cent depreciation. IRDA added that since paint material is polymer based and hence the depreciation applicable to plastic parts can be applied for it. As such a depreciation rate of 50% is proposed for painting charges too. This would be 35% of the total painting charges or the actual whichever is lower. Currently this proposal is under review and suggestions are sought from the stakeholders by 9^th November 2012.