Third-party motor insurance

Third-party motor insurance premium

If you have a small car (up to 1,000 cubic capacity, or cc), you may have to pay almost double the premium on the third-party component of your car insurance policy. The Insurance Regulatory and Development Authority of India (Irdai), in its draft circular on third-party motor insurance premium, proposed a premium hike in the range of 29-108% with the maximum hike of 108% being proposed for small segment cars.

What is third-party insurance?

Third-party insurance is mandatory for all plying vehicles. The premium of motor third-party insurance is controlled by the insurance regulator and is tarriffed. For other motor insurance covers, such as own-damage, which covers damage to one’s own car, the premium is decided by the insurance company. In case of an accident that causes bodily injury or loss of life, the claim amount under third-party insurance cover is unlimited. The entire amount of compensation is borne by the insurer. How much to pay is decided by the court by taking into consideration the earning capacity and age of the injured/deceased person. In case of damage to property, the maximum liability is limited to Rs.7.5 lakh.

Why the increase?

Owing to adverse claims experience due to unlimited liability, but fixed premium rates, insurance companies have suffered big losses on account of third-party insurance. According to the draft circular, the industry reported 38,461 death claims over a claim amount of Rs.1 lakh in financial year (FY) 2014. The total amount paid was Rs.2,343 crore, or an average of around Rs.6 lakh per claim. This is an increase of 12% in the average claim size over FY13 and is expected to only go up.

To bring some parity between third-party premium rates and the huge loss ratios, the regulator, in 2011, agreed to review premiums yearly on the basis of parameters such as average claim amounts, frequency of claims, expenses involved in servicing the motor third-party business and cost of inflation index for the year of review.

Accordingly, Irdai, for FY16, has proposed an increase from Rs.1,129 to Rs.2,346 in the third-party premium rate for a four-wheeler not exceeding 1,000 cc. For those cars between 1,000 cc and 1,500 cc, the proposed rate hike is of Rs.1,920—an increase of 44.12% from Rs.1,332 earlier. The premium for this segment will be lower compared to small cars. For cars that exceed 1,500 cc, a 28.8% premium hike is proposed, which takes the premium from Rs.4,109 to Rs.5,292.

According to the insurance industry, the steep increase for small cars is due to the popularity of the segment and the rise in the quantum of death claims. Also, considering that the damage to the third party is agnostic of the type of the car, the draft aims to bring some parity in premiums, which is currently very low for small segment cars. In FY14, the insurance regulator had proposed a hike of 137% for the premium for small cars, but finally moderated it to 20% for all private four-wheelers.

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