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.

Max Life Insurance disinvests 5% stake from Mitsui Sumitomo

The Insurance industry has started showing the first sign of reaction to the proposed decision of increasing the FDI limit to 49% from the existing 26%. Earlier this year in April 2012, Mitsui Sumitomo had acquired New York Life Insurance’s 26% stake in Max New York Life Insurance (Then a joint venture between Max India and New York Life Insurance). Since then the Insurance Company has be renamed Max Life Insurance. The deal was estimated to be around Rs 2700 Cr.

However unlike New York Life Insurance, Mitsui Sumitomo doesn't enjoy the privilege of increasing the stake from 26% in case the FDI limit was relaxed (as proposed now to 49%). Now when the Government has decided to increase the FDI limit, Max Life Insurance has disinvested 5% stake from Mitsui Sumitomo.  With Indian promoters having invested Rs 21,000 Cr and foreign investors putting in Rs 7000 Cr in the past decade in the segment, the new FDI cap raise is expected to draw in another Rs 30,000 Cr in the next five years, given the approval in the parliament.

Max India and Max Life Insurance chairman Analjit Singh stated that the disinvestment is a move aimed at unlocking the valuation from their life insurance business and that the decision is purely commercial. However with the above mentioned figures in terms of proposed FDI investment, can this stake disinvestment be also seen as a planned move for welcoming further foreign investments?

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Experts speak on FDI reforms in Insurance

Sometime back in July 2012 we had written about the first positive ripples of investment in the Insurance Sector. We had discussed about the possibility of increasing the FDI investment cap from the erstwhile 26% to 49%. With the recent ongoing parliamentary discussions this possibility might soon be a market changing reality for the Insurance Business. Though we have to wait till November and hope for a smooth approval of this proposed reform, let’s have a look at how the industry is impacted and what the industry experts have to say on this:

Puneet Nanda , executive director ICICI Prudential : “Raising FDI cap will send positive signals to foreign investors and will encourage new players to enter the Indian insurance market. Increased competition will lead to the introduction of newer and lower-priced products and better service from insurance firms.”

Vibha Padalkar, executive director and chief financial officer, HDFC Life: “More companies will enter the sector because India is an underpenetrated country when it comes to life insurance products. Along with lower prices, customers will also see new products hitting the market”

Nathan Parnaby, CEO of Standard Life’s Asia and emerging markets division: “The Indian government and their finance minister are doing the right thing…We would like to look at the opportunity of increasing our stake”

[Standard Life holds 26% stake in HDFC Standard Life Insurance]

Louise Shield, an RSA spokeswoman: “We welcome the move, it’s a step in the right direction”

[RSA holds 26% stake in Royal Sundaram Alliance]

Although RSA has not expressed any interest to increase their stake in Royal Sundaram Alliance, others like Standard Life and Prudential (currently having stake in ICICI Prudential) have expressed interest to take advantage of this reform. As per market experts, Standard Life and Prudential would need around 300 million pounds and 700 million pounds respectively to increase their stakes to 49% in HDFC Life and ICICI respectively. Although a 49% doesn't give any controlling stake to either of them, it induces greater involvement and interest in business strategy, management and implementation.

From every corner of the globe we are getting positive vibes about this proposed reform. Perhaps opening up FDI in Insurance is a great way to explore the full potential of a strong market as India. We certainly hope that this move is not thwarted by unreasonable political aspirations.

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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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Attrition amongst agents in the insurance industry.

The changed guidelines on ULIPs has resulted not only in the decrease in premium but also has led to a high attrition of the agents. ULIPs are market linked insurance products where the cash value varies according to changes in the market. The worst hits are those companies who don’t fall in the bancassurance sector. Since the strong agents channel is critical for these companies they are looking into all sorts of ways to contain it. According to the IRDA at least 10.45 lakh agents have left the business compared to 7 lakh who joined resulting in a net 35 percent dip.

This attrition can be a direct result of the changed ULIP guidelines. These days ULIPs are not as attractive and lucrative as it used to be. This change had also resulted in a huge drop of premium collected. Subsequently the commissions earned also decrease something which is prompting agents to leave the business. The commission for selling ULIPs has been slashed from 15% to 5% now. Apart from this fall in commission, the performance of ULIPs has also instigated agents to take a break from it. Earlier some huge proportion of mis selling had happened where agents asked naïve customers to pay premium for three years and get a double return on the fourth year. Now with the poor performance of the market, these agents are seeking refuge and trying to stay away.

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