All You Should Know about IRDAI’s withdrawal of long-term own damage cover for motor insurance
PUBLISHED ON July 13, 2020 EST READ TIME: 5 MIN
From 1st August 2020, the IRDAI (Insurance Regulatory and Development Authority of India) has decided to withdraw the long-term package cover, which offered third party motor insurance cover and own damage cover, for three years in case of new cars and five years in case of new two-wheelers.
The long term motor insurance cover package was first introduced on 1st September 2018, which enabled insurance buyers to purchase motor insurance in two ways. One was the purchase of both the third party insurance and own damage insurance either for three years or five years, known as the long term package cover. And the other one was the purchase of the third party insurance cover for a long period and own damage cover for one year, known as a bundled cover.
What will be different with the policies offered from 1st August 2020?
From 1st August 2020, the motor insurance providers (car insurance providers and two-wheeler insurers) will not be able to offer long term own damage cover for new vehicles to insurance buyers. The insurance buyers will have to choose single year own-damage cover along with the mandatory cover of three years or five-year third party insurance cover. The IRDAI considers this move to be a customer-friendly one as customers will now have the choice of purchasing the own damage insurance cover for a year only.
What is the reason for this change?
Now, take a look at some of the major factors due to which the regulatory authority (IRDAI) has taken the decision to withdraw the long term own damage insurance cover for motor vehicle insurance.
- The affordability factor related to long term own damage cover among a major section of the vehicle owners was causing challenges for the proper distribution of the package policies.
- It has also been noted that the possibilities of forced selling of insurance policy package due to the financial interests associated with loans were quite high. In case of any deficiency in services, the policyholders did not even have the flexibility to change the options and were burdened with the long-term insurance product purchased.
- The IRDAI has also stated that the actuarial pricing was becoming a challenge for the insurance providers of the long-term own damage insurance covers.
- Moreover, there was a lot of confusion and dissatisfaction among the policyholders due to the non-uniformity of the NCB structure.
Will this change affect the new car and bike prices?
The change in the regulations related to own damage insurance cover will not have much impact on the prices of new cars or bikes. This is because, in the first place, the choice to purchase a long term own-damage cover was optional. Moreover, the change in regulations will help in simplifying the choices that can be presented to the insurance buyer at the time of purchasing a car insurance policy or a two-wheeler insurance policy.
However, some other effects are expected to occur due to this change in the own damage insurance cover regulation.
- This change in regulation will help reduce the cost of the first-year insurance that is purchased for the new two-wheeler or four-wheeler.It will also help in reducing the upfront cost of vehicle ownership for new buyers. This can be counted as a positive impact on consumers.
- The withdrawal of the long term own damage insurance cover by the IRDAI will also ensure that the insurance buyers are not held to any particular insurance provider. This is because a policyholder will now have the ability to change his own damage cover to another insurance provider at the time of motor insurance renewal.
- This change in the regulation might lead to uncertainty in the premium for the second year of the own damage insurance cover. The insurance providers will now have the ability to determine the price of the second year premium based on its underwriting terms against a fixed premium, which has been paid previously for consecutive 3 years.
- It will also offer an advantage to the insurance buyers as there will be increased competition among insurance providers for the premium of the second year.
- Policyholders can now obtain their No Claim Bonus without any hassle or confusion as it will be provided according to the India Motor Tariff. It will be mostly dependent on a yearly claim that has been made by an insurance provider within the long term policy.
Hence, the decision of the withdrawal of the long-term own damage cover by the IRDAI will help the new buyers of two-wheelers and four-wheelers to relax. Moreover, it will also resolve various concerns faced by both motor insurance buyers and the insurance providers.
Disclaimer: The above information is for illustrative purposes only. For more details, please refer to policy wordings and prospectus before concluding the sales.
This blog has been written by Mukesh Kumar