Published in livemint on 25 Jun 2019.
Come September 1, motor vehicle owners will be allowed to purchase standalone own damage (OD) insurance cover. An OD cover insures the vehicle against theft and damages. The guidelines will be applicable for all new and old cars and two-wheelers. At present, the industry practice is to bundle OD insurance with third party (TP) insurance policy. TP liability insurance covers the insured if he is held legally liable for damages caused to a third party. But with this announcement by the Insurance Regulatory and Development Authority of India (Irdai), vehicle owners will be allowed more flexibility on two counts: Firstly, one could choose to buy an OD cover at a later date although it is not advisable, and second, they could buy this cover from a different insurer. TP insurance continues to remain mandatory for you to drive your vehicle on the road.
“This will allow the customer the flexibility to choose any insurer for renewing their OD policy, even if the third-party policy is from another insurer,” said Onkar Kothari, company secretary and compliance officer, Bajaj Allianz General Insurance. Having OD insurance helps you cover any damages your vehicle suffers in an accident, such as fire, road collision or vandalism, as well as theft of the vehicle or its parts. Other than OD and TP covers, a comprehensive motor insurance policy also covers personal accidents, which provides compensation in case of death or permanent disability caused in an accident involving the insured vehicle.
In July last year, the Supreme Court mandated that all insurers make their third-party insurance policies a three-year long comprehensive product for cars. For two-wheelers, it became compulsory to have a five-year TP insurance cover. This was done to ensure that “road accident victims do not suffer due to the fault of the owner in not renewing his or her policy every year,” said the panel report.
However, the Supreme Court’s guideline applies only to TP insurance, and not OD policies. “There cannot be a rule about making own damage insurance mandatory because it’s for your own car. Insurers can issue standalone TP insurance, but most private-sector insurers sell it as a bundled product with OD cover,” said Abhishek Bondia, principal officer and managing director, SecureNow.in, an insurance intermediary.
Most insurers don’t offer standalone OD covers. According to Bondia, if you bought TP insurance from one insurer and decided to buy an OD policy from a different insurer, the latter would ask you to purchase the TP cover as well. It’s important to keep in mind that an OD cover is an annual product. “This causes misalignment in the market. When you buy a new car, the dealer offers you a policy from X insurer which is a three-year TP and one-year OD. When the OD comes up for renewal a year later, because your third-party is from X insurer, you are forced to buy an OD from them as well,” said Bondia. This is because no other insurer would issue a standalone OD cover under the current dispensation. “In a way, you’re locked in with X insurer for three years and because they know this, they may not offer you a competitive premium,” Bondia added. This means your bargaining power as a customer is significantly reduced.
Irdai’s new regulation intends to tackle this problem. The regulator has stated that the issuance of bundled policies for cars and two-wheelers will not be compulsory and all insurers will have to sell standalone OD insurance policies, which would be a year-long product, for all new and old vehicles. Long-term standalone OD policies are not permitted by the regulator at present. However, keep in mind that in order to purchase an OD cover or to renew an existing policy, it is compulsory to have a TP liability insurance. Your own damage policy documents will indicate the name of the insurer from whom you have purchased the TP cover, policy number, and start and end date of the TP cover.
What it means for you
According to insurers, this is a positive move from the policyholders’ point of view. Sanjay Datta, chief – underwriting and claims, ICICI Lombard General Insurance Ltd, said that this will give policyholders more options when it comes to buying an OD policy, but the premium could vary from insurer to insurer. Even at present, OD premiums vary across insurers. “Across all insurance companies, TP is priced the same. For OD, you can have different rates across companies, but now the customer will no longer need to buy the OD from the insurer the car manufacturer recommends. They can decide which insurer they want to buy it from, at their own convenience,” said Datta. He added that there’s also a possibility of insurers coming up with “richer” covers that have more inclusions and price them at different levels.
Subramanyam Brahmajosyula, head, underwriting and reinsurance, SBI General Insurance, said that for almost every insurer, the OD portfolio tends to perform much better in terms of loss ratios than the TP portfolio. So one can expect greater competition among insurers to try and acquire more standalone OD policy buyers. “There is a possibility that premiums would reduce as a result of this, and consumers would benefit. Another way policyholders will benefit is in terms of choosing the insurer. Among the two components, the OD portion is where the servicing capabilities of an insurer comes into play in the event of a claim. An insurer who has a good reputation in terms of settlement of claims and a large network of cashless garages will benefit,” said Brahmajosyula. Bondia believes that it’s a policyholder-friendly move and would bring balance to the market. “When the car comes out of the showroom, you can just buy a TP for three years without having to buy an OD from the dealer. You can buy the OD later, at your own discretion. This will encourage insurers to maintain parity in their pricing across standalone OD and packaged options. They will have to be fair to the customer,” said Bondia.
Through its recent circular, Irdai is trying to bring fair pricing into the motor insurance market. Not only will this move put more power in the hands of the policyholder, it is also likely to lower premiums because of increased competition.