Calcutta, Jan. 1: Small car owners may have to shell out less for renewing or buying motor insurance policy, while big car owners are likely to pay more. This is all because motor insurance has been partially de-tariffed from today.

Motor insurance has, so far, been under a tariff regime in which general insurance companies charged the premium at a rate predetermined by the Tariff Advisory Committee.

Own damage liability

Insurance regulator IRDA has now given the insurers a free hand in deciding the premium for ‘own damage liability’ of policies depending on their risk experience. However, according to the regulator’s directives, insurers cannot lower their premium (for their own damage liability) by more than 10 per cent from the existing rates.

The Insurance Regulatory and Development Authority (IRDA), however, has fixed the premium for ‘third-party liability’ for different vehicle categories. While doing so, it has raised the premium for third-party insurance by 33 per cent to 257 per cent.

Third-party premium

The rise in third-party premium is more for larger engine capacities. For instance, private cars with more than 1,500cc engine capacity will have to pay a premium of Rs 2,500 now against Rs 700 earlier. But the premium for cars between 1,000cc and 1,500cc will be Rs 800 compared with Rs 600. The third-party premium has almost doubled for less than 150-cc two-wheelers. The hike is 226 per cent for over 350 cc bikes.

Good news?

Following this steep hike in third-party premium across all vehicles, any decline in composite premium (owner damage + third party) will depend on the extent to which insurers reduce their rates for ‘own damage liability’.

However, with own damage accounting for 70-80 per cent of the composite premium, it may appear that a 10 per cent reduction will more than offset the increase in the third-party premium and, therefore, will reduce the overall outgo.

True picture

But that may not always happen in reality. “Although the regulator has allowed insurers to reduce their premium by a maximum 10 per cent, actual reduction could be less than that,” said Neeraj Kumar, deputy general manager, who is handling de-tariffing in National Insurance Company.

“In the de-tariffed regime, the premium will be commensurate with different risk factors. However, insurers cannot significantly reduce or increase their premium unless they provide the regulator with ample data to support their risk assessment regarding a factor they want to include in their risk-rating system,” he said.

“It is believed that a colourful car is more likely to be stolen. But how can you include this factor in your risk-rating system? There is no data available on this. Similarly, there is no system to determine the number of times a driver has jumped signals, has committed accidents and has been fined despite a smart card driving licence. The existing tariff system (for own damage) meets 95 per cent of our pricing requirement and we are not including any new factor to determine premium for the time being,” Kumar said. “We are expecting the final guidelines from IRDA in five to six days,” he added.

Small wonder

In any case, the premium for small private cars will come down, said Kumar. “Even in the de-tariffed regime, premium will largely depend on the use of the vehicle (private or commercial), its road occupancy, its engine capacity and location. The premium for big cars may go up,” he added.

Lucky few

However, the premium for some big cars may come down. For instance, people who own a Mercedes or a BMW, and use it sparingly for short distances, may have to pay a lower premium than the existing rates. “The parts of big cars are costly, which, in practice, prohibit insurers to reduce their premium (for own damage),” said an official of a private insurance company.

“IRDA has fixed the third-party premium for different categories of vehicles as an interim measure to facilitate smooth passage to a fully de-tariffed regime,” said Bhudev Chatterjee, an actuarial consultant and member in the committee that determined the new third-party premium.

“This is an outcome of a risk pool created by the regulator,” Chatterjee added. “While insurers make profits, though small, on own damage, third-party insurance is a highly loss-making business. Because of this, private insurers have been denying third-party cover to old and commercial vehicles. Public sector insurers had to shoulder the burden. Now, all insurers will be members of the risk pool and will share the loss equally. No insurer can now deny cover to anyone,” he added. To protect their profit, insurers may not reduce the composite premium to the extent expected.