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.

General Insurance gets two more Companies in India

The general insurance sector of the Insurance industry grew more competitive as two new players have formally launched their operations. These new players are Religare Health, an initiative of Religare Enterprises Limited, Union Bank of India and Corporation bank, and Magma HDI General Insurance, a joint venture between non-banking financial company Magma Fincorp and HDI Gerling, a leading German Insurer. 

Religare Health had launched their operations in July 2012. In the last 3 months, it has an impressive performance of collecting around 14 crore premium, operating in 134 centers and servicing more than 34,000 customers. Although currently they have only one insurance product named “Care”, they have ambitious plans on board to launch products for critical illness, overseas student travel medical insurance and also policies for HIV patients.  Currently their health insurance product “Care” comes with certain salient features outlined below

•           It offers a sum assured upto 60 lakhs to suit the customized requirements of every consumer.
•       It has the option of availing specialized treatment anywhere in the world of sum assured over 50 lakhs
•      It offers annual health check up facility, automatic recharge of sum insured in case the claims exhaust and no claim-based loading on premiums.
•      It offers lifelong renewability and daily allowance to cover incidental expenses during hospitalization
•       It has tie up with around 1800 hospitals across India.

Magma HDI General Insurance (MHDI) would target offering a comprehensive end to end solution to customers by financing vehicles and offering insurance to the assets purchased. Magma Fincorp (one of the partners in the JV) are mostly present in semi urban and rural areas which are relatively unpenetrated markets for insurance products. Thus they aim to explore these markets and chalk out a strategy to survive in the already competitive market of insurance. They plan to launch operations in 39 locations with work strength of around 500 people.

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IRDA introduces the declined risk pool for the Indian Motor Insurance industry.

The last fiscal was not at all encouraging to the Indian Motor Insurance Industry. The loss ratio currently stands at 145%. Simply put for every Rs 100 premium paid, the loss incurred is Rs 45. Under the Indian Government Laws, third party cover is a mandatory purchase along with the purchase of your vehicle. However due to high losses, private insurers refrained from providing third party covers. Therefore Insurance Regulatory and Development Authority (IRDA) came up with this motor third party pool in 2007, where premiums pertaining to third-party risks collected by all general insurance companies are added to this pool. All claims paid are debited to this motor pool. Based on the market share of the insurance companies, the losses from the third party pool were shared by the insurance companies. The third party premium for all vehicles is regulated and insurers have no role in deciding the premium. As a result efficiencies have found its way and even those insurance companies which were not aggressive with car insurance had to bear the brunt of these loses because of their market share.

However this third party pool would undergo a change from April 1st, 2012. IRDA has already come up with their guidelines addressing the concerns raised by the loss making car insurance market. They have recently formed another pool called the “declined risk pool for third party motor policies”. This new pool would apply to commercial vehicles for standalone third party insurance liability. Comprehensive motor insurance cannot be settled from this pool. Third-party insurance cover protects the vehicle owner from any financial liability in case of damage to life or property in an accident to the third person. Comprehensive motor insurance adds the personal vehicle damage cover also to it. Comprehensive motor insurances are hence more expensive. The removal of the comprehensive policy would shrink the size of the newly proposed motor pool to a quarter of its original size. The present size is about Rs 6000 crore. According to IRDA, the insurance companies would retain 20% of the gross premium in their own account, 10% would go to General Insurance Corporation of India and the rest 70% would go to the motor pool.

This new declined pool would hopefully reduce the loss ratio of the motor insurance market and make things more transparent and fair for the insurance companies. However in view of these new regulations and other inflationary measures, motor insurance premium might go up by 10- 15%.

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This week’s top Investment News in the Insurance Sector

Some of the top investments news in the investment sector this week

• Reliance Life Insurance plans to divest 23% stake in the domestic public and private lenders or banks. This come after Reliance has already signed a pact to sell 26% to Nippon Life. Some of the banks which have taken interest in this deal are Axis Bank and Syndicate Bank
• Exide plans to pump in another round of investment in ING Vysya Life Insurance Company. This time the amount would be somewhere around Rs 150 crore. It should be noted that Exide has already been investing in ING Vysya Life Insurance.
• Piramal Healthcare is planning to buy Enam Financial’s stake in ING Vysya Life Insurance. The present valuation of the insurance company stands at Rs 2400 crore. Last year Piramal Health got Rs 17,190 crore from Abbott Laboratories for its generic unit.
• Life Insurance Corporation of India (LIC) plans to invest more than Rs 2 trillion through the March fiscal. Apart from this its planned investment in equities will exceed last year’s Rs 400 billion.

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