The Insurance Regulatory and Development Authority of India (IRDAI) has withdrawn the long-term motor insurance policies from August 01, 2020. This comes as a huge relief to car buyers as car prices are expected to come down with this change.
In India, you can look at motor insurance policies in two parts – third-party liability insurance and own-damage insurance. The Motor Vehicles Act, 1988, mandates third-party liability insurance for all motor vehicles. Own-damage insurance was optional.
However, a few years ago, the Supreme Court of India ordered insurance companies to mandatorily issue long-term third-party liability policies when a new vehicle is sold. For cars, this was a three-year policy. Also, on previous occasions, the IRDAI had recommended general insurers to offer long-term policies, including both third-party and own-damage coverage for extended periods.
After the Supreme Court’s order, the IRDAI advised insurance companies to offer standalone own-damage policies since third-party liability was already covered. On top of this, financial institutions demanded vehicles to have comprehensive coverage to offer loans to buy them.
These factors had led to the premium on four wheeler insurance policies climbing up to ₹40,000.
What are the Changes in the Motor Insurance Rules?
In the wake of the recent circumstances, the IRDAI was forced to reconsider this decision about long-term policy packages. The increased premium amount had led to a substantial increase in the cost of ownership of a new car. Another issue was that with a long-term policy, car owners had no option but to remain stuck with an insurer even if the services are deficient.
Hence, from August 01, 2020, the IRDAI decided to discontinue the mandatory long-term four wheeler insurance packages that covered third-party liability and own-damage. However, the long-term third-party liability cover will remain mandatory, and new car owners will have to buy a three-year third-party liability cover with a new car.
Difference Between Third-Party Insurance and Comprehensive Insurance
Just to make it clear, when you buy a third-party liability cover, the policy protects you from damages to third-party property or person if it is caused by your car. However, this does not compensate you for any loss or damage to your vehicle. On the other hand, if you buy a comprehensive car insurance policy, then you are protected against any loss or damage to a third-party or own vehicle due to a range of reasons.
Will the Change in Motor Insurance Rules Affect the Prices of Vehicles?
Yes! It will.
The prescribed changes by the Supreme Court and IRDAI regarding the scrapping of long-term comprehensive insurance will definitely make buying a new vehicle cheaper in India. Here’s how:
- Reduce the cost of buying insurance for new cars: With this change, there will be a reduction in the on-road prices of new vehicles. This will be specifically applicable to people who don’t prefer buying a comprehensive policy and opt for a third-party liability cover only. However, if you prefer opting for a comprehensive cover out of choice, then the prices will still be lower as you can buy just one-year own-damage (OD) cover, instead of a three-year one. However, you will have to bundle the one-year OD cover with a three-year third-party cover.
- Reduce the on-road prices of cars and improve their sales in the country: The IRDAI made this announcement at an important time since the auto industry has been struggling to boost new sales. Since 2018, there has been a downturn in the number of sales of new cars and two-wheelers. 2019 was worse with general elections and other macroeconomic factors leading to a further decline in sales. However, while the BS6 norms were expected to help boost the numbers in 2020, the COVID-19 pandemic pulled the brakes on those expectations too. The regulator expects this rollback to encourage vehicle buyers who have been delaying purchasing new vehicles due to the increased costs.
Additionally, the scrapping of long-term comprehensive cover will benefit car owners as they no longer have to remain stuck with an insurance company if they are not satisfied with the level of service offered by it.
While this regulation makes buying cars cheaper, we urge you to assess your insurance requirements carefully before buying a vehicle insurance. If you drive through accident-prone areas like busy intersections or national highways, etc., then the chances of a collision or an accident are higher. Also, if you live in an area where car thefts are common, or vandalism is frequent, then you might want to purchase a comprehensive plan.
The economic slowdown due to the pandemic has led to people saving costs wherever possible. While a personal vehicle has proven to be a necessity during these trying times, most people are sceptical about buying one due to the increased costs. With this regulation, the IRDAI is extending a hand to the auto industry and future vehicle owners to buy one with the minimum insurance requirements. If you are planning to buy a new car, ensure that you check with the dealer about the implementation of this new guideline and not be coerced into buying a policy that you don’t need or want. Good Luck!