CAR COVER: Bleeding insurance companies dry

It was on a rain-soaked afternoon that 18-year-old Rakesh Trivedi decided to have some fun with his friends in his father’s brand-new Maruti Zen. Speeding down Red Road, the class XII student was goaded by his friends to keep pressing the accelerator. While negotiating a sharp turn at the crossing of Mayo Road the car skidded, spun out of control and hit a tree. Rakesh and his friends were lucky to get away with minor injuries but not the vehicle. The front portion of the car was completely battered. The damage ran to thousands of rupees but Rakesh’s father didn’t have to dig into his pocket to get the car back into shape. The insurance company took care of that. Within a month Rakesh was back on the road with the car that barely had any trace of the battering it received.

Thousands of similar claims are filed with insurance companies every month. They have no choice but to compensate the car-owner since a damage claim can’t be refused. And it has left them “bleeding”. Several insurance companies suffer a “200 to 300 per cent loss” on account of car insurance.

All that is set to change from next year when the new Insurance Regulatory and Developmental Authority (IRDA) regulations come into effect. A committee formed by IRDA has proposed that the age, occupation, traffic conviction records, health and habits of the owner be taken into account while fixing the insurance premium rates. This is going to be in addition to the existing parameters — age of the vehicle, make, model, engine, capacity and geographical location. It means insurance rates are going to be deregulated leaving it to the insurers to decide. The panel has suggested that the rates be based on a risk factor rating system (RFRS) taking the owners’ profile into consideration as is the practice in most European countries and the US. Everywhere, a teenager is considered to be a bigger risk than an adult, a woman a lesser risk than a man while a younger person is believed to be more prone to rash driving than an elderly one. Premium rates vary accordingly.

But are the IRDA proposals going to benefit the consumer? General manager finance of Mukesh Hyundai Motors Ayon Dutta Gupta believes they will. “If premium is detariffed, there will be more competition among the insurers leading to better, competitive rates. Even if they are slightly higher, the system will be far more rational and the consumers would be getting a number of value-added services. Also, car insurance at present means just recovering your maintenance money, which isn’t what it should be. It’s got to be customised,” Dutta Gupta says.

Vinay Jha, regional head, HDFC CHUBB, says, “Car insurers will have a complete database of the vehicles on the road. They will evolve their own rates based on this that’s going to be more scientific.” But the executive believes that consumers won’t be burning a hole in their pockets for the new rates aren’t going to be very different, at least initially. At present, car-owners pay an annual premium, which is 3.127 per cent of the price of the car for a below-1000 cc vehicle. For vehicles between 1000-1500 cc, the rate is 3.283 per cent, and for cars above the 1500 cc mark, the rate is 3.44 per cent. Rates are different for commercial vehicles.

The genesis of the new regulations lies in the proposals of the Justice Rangarajan committee that suggested withdrawal of tariffs for the comprehensive policy (which covers damage to the car and is optional) sometime back. The present committee headed by S.V. Mony was asked to provide “milestones” to be adopted in the post-tariff scenario. “Once we stop prescribing the rates, each company will be fixing its own premium. There could be confusion so we need some universal parameters. Initially, IRDA shall check and guide the companies on how to go about it. So the change has to be gradual,” says IRDA chairman C.S. Rao. But the new system will ultimately benefit the consumers, Rao believes. “There will now be plenty of scope to settle claims judiciously and for lower rates for owners who have a clean driving record. Insurers might even be allowed to refuse renewal of a policy if they feel the owner is a “bad risk”.

The IRDA has floated a website asking people to put in their suggestions on what the new regulations should be like.

It has, however, been announced that the third party insurance (that covers loss or damage caused to a third party by the vehicle and is compulsory) premium rates will continue to be regulated by the IRDA.

But there are grey areas in regard to assessing the owner’s personal profile. It’s not clear whose profile will be taken into account in case of a chauffeur-driven car. “For commercial vehicles it’s going to be the driver’s profile for sure. But that’s not possible for private vehicles. They might suggest specifying if your car is going to be chauffeur-driven in which case you will have to provide the driver’s details. Alternatively, they could be fixing the premium based on the history of the car,” says Rao. That, he admits, won’t be possible till an authentic database of vehicles is made available to the insurance companies, which could be a gigantic task. “But the best thing about the proposals,” says Dutta Gupta, “is that there will now be a distribution of risks that’s a fair system. And the disciplined driver stands to gain.”