Driving style to govern car insurance

In the six years that she has been driving her Maruti Zen, Hannah Joan has made no claims on her auto insurance policy. Reason enough for her to remain unperturbed as free pricing (referred to as de-tariffing) of auto insurance premiums comes into effect from January 2007.

From then on, general insurance companies would be able to price the premium on motor insurance depending on factors like the driver's age and record, vehicle and usage. In a deviation from current practice, the regulator, Insurance Regulatory and Development Authority (IRDA), will allow insurance companies to freely fix the price (or premium) of motor insurance depending upon the company's risk data.

At present, premiums on cars are fixed and car owners have never felt the need to monitor how they drive or maintain their vehicles. But, with the new rule, these will become the deciding factors that influence pricing of car insurance premiums. 

Amol Phadnis, national manager underwriting, ICICI Lombard General Insurance, says: "Good drivers will be rewarded in the new pricing policy. Rash drivers will have to bear the cost by paying higher premiums to cover attendant risk." 

How you drive

Car premiums will depend on various factors such as a driver's age, driving experience and the miles covered. For instance, as Joan drives her car only to work and for family outings, the number of kilometres covered by her Zen will be lower compared to a commercial taxi.

Fewer miles on your odometer translate into lower premiums. If cars are parked on the road and not in a car park, the risk of it being damaged or stolen is larger and will, naturally, attract a higher premium. Repair cost, as well as the cost of spare parts, will play a crucial role in determining the premium rates that have been ignored in the present pricing structure.

What you drive

Petrol costs may have got you thinking about shifting to a diesel car, but think again. Diesel cars may attract higher premiums as automobile insurance experts feel that these cost more to maintain. Car majors like Maruti are talking to insurance companies to provide a favourable premium rate for their vehicles on the premise that the cost of repair and spare parts for Maruti cars are lower than those of other cars in the same segment. 

HANNAH JOAN 32
HR executive

Uses her car only to commute to her office, 30 km from her home, and for family outings
"The insurance companies should also consider the fact that the condition of roads in India is very bad. Even if I drive cautiously, something might happen and still I will have to bear the cost."

Analysts reckon that for a car, the lower the cost of repair and spare parts, the lower will be the premium in a free-priced market. It is also expected that free pricing will act as a spur for car makers to evolve ways of manufacturing so that repair cost are not huge (and whose spare parts are also not expensive compared to similar cars), since the consumer will largely be driven by price.

S.S. Gopala Rathnam, head (operations), Cholamandalam MS General Insurance Company, points out that a car owner

will also be offered a choice on the level of insurance to be taken in a free-priced market. Say, you are the sort of car owner who treats your car like your baby, or if you own a Mercedes-Benz or Porsche or BMW, you can opt for 'insurance replacement value'. This means that the premiums paid will reflect the cost of replacing the car with a brand new one.

For those of us who own a small car, 'insured declared value' may be more suitable. A vehicle undergoes a certain wear and tear, called depreciation, and, as a customer, one can choose to pay the premium on the residual value, which is the current price minus the depriciation over the years, rather than on the purchased value of the car. If the car is reduced to a piece of junk, insurers may not be willing to insure it at all. Currently, the premium amount is about three per cent of the car's total value.

Where you live

 Today, premiums depend on three broad factors—zone of travel, engine capacity of the vehicle, and the value of the car. From January, the pricing of premium will also take into account region of travel, driver's experience and mileage travelled annually, among other factors. Car owners in cities with high traffic density like Mumbai will have to pay higher premiums compared to those who live in places where the traffic density is lower. Same is the case if you are a resident of Delhi, where the rate of reported car thefts is the highest.

Claim Record

Despite the fact that car insurance is mandatory under law, there are people who forget to renew their insurance on time and end up driving uninsured vehicles. Phadnis points out that very often people forget to renew their car insurance because a new car comes bundled with insurance. In case the uninsured vehicle has an accident, not only would the owner have to bear the financial damages, he would be an offender in the eyes of the law.

Car insurance claims have two components: own damage segment and third party liability (TPL). In the event of an accident, damages to the car is called 'own damage segment' and this should be borne by the insurance company. However, if the claim is less than Rs 2,000, then the insured can bear the cost and avail of the 'no-claims bonus' option while renewing the policy. 

The TPL gains importance as the insurance company is liable to pay the losses resulting in injury or fatality of the other person involved in the accident.

 This is likely to be an important factor based on which premiums would be decided in the new era. Though it may seem that premiums will be fairly priced in a free priced scenario, Irda is wary that insurance firms could resort to undercutting to offer lower premiums in order to grab market share. To avoid this, the regulator has mandated that insurance companies can neither change the wording of the policy documents. nor bring in differentiated products till March 2008.

All that is fine, but what about the ground conditions. Joan has a valid point when she says: "The insurance companies should also consider the fact that the condition of roads in India is very bad. Even if I drive cautiously, something might happen and I will still have to bear the cost.

Smart tip: If you are replacing your old car with a new one, save 20-50 per cent on the first premium of your new car by transferring the no-claim bonus carried forward from the old car.