Cost of Motor Insurance may jump up with long term Third party motor cover made mandatory for new vehicles

Mandatory long term insurance at the time of purchase of vehicle itself would bring down the gap between the insured & uninsured vehicles plying on the roads. Alarming increase in road accidents and the huge number of uninsured vehicles is a serious concern towards the safety of Indian citizens. Driving a vehicle without cover is an offense under the Motor Vehicle Act, 1988. Road accident individuals who are third-party victims add economic burden to the nation.

Supreme Court order

Supreme Court’s ruling on the mandatory long term third party Insurance policy for new two wheelers and four wheelers is indeed a welcome move to address the poor compliance of third party insurance of vehicles that puts road users at risk. Apex court decision came with the backdrop of around 18 crores vehicles were plying on the roads of the country out of which only six crore have third party insurance and estimation of deaths due to vehicular collision accounts for 150000 every year in the country.

Let us first understand the term, “Third Party Insurance”.

Third party insurance is mandatory by law. Third Party Insurance pays for legal liability in case of injury or damage to third party or property due to the use of vehicle in public place. As name suggests, the beneficiary of the policy is neither the owner of the vehicle who has insurance cover nor the insurance company who has provided the insurance coverage, but the third party (bystander) who gets injured or dies in a road mishap, or the property of third party got damaged by use of vehicle in public place.

Current Scenario

Currently, Insurance companies are offering one year policy for private cars and up to 3 years policy for two wheelers. Court has also said that it would be at the option of the owner of the vehicle to decide which policy should be taken except that the third party insurance is mandatory. This ruling by court will indeed increase the number of insured vehicles and lead to higher penetration and premium volumes. There is still uncertainty over the pricing of long term third party policies as Third party premiums are based on the claim experience and is regulated entirely by IRDAI.

Insurance Company point of view

As third party premiums are completely regulated by IRDAI and are subjected to revision every year, insurance companies are expecting the regulator to come up with indicative five years third party premiums for two wheelers and 3 years for four wheelers. Insurance companies would have to work on their product design along with regulator so that appropriate pricing evolves. There would be some challenges to Insurance Companies like, building-in NCB in long term policies etc.

Benefits to Insurance Companies

Insurance companies may extend discounts to the customers on the long term policies as it will reduce administration cost of the insurance companies due to upfront payment of premium also increasing investment incomes for the insurance companies.

Customer point of view

According to the experts in the industry, at the time of purchase of the vehicles customers would have to opt for mandatory long term third party policies with a choice to purchase the Own damage cover either for one year or for long term, depending on the premium paying capability of the customers. Own damage cover for one year can be renewed yearly. Comprehensive package policy including both OD & TP for long term could be an option for those who cannot afford to pay the entire premium upfront.

Benefits to customers

Long term policy will save the vehicle owners hassle of renewing insurance policy every year & would offer price stability. Though, customers would have to face challenges like getting tied up with the insurance company for multiple years with whom he did not have good experience.

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