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Published in Mint, on 21st Feb 2017

If you are buying a new car, buying insurance for it is perhaps the last thing on your mind. Plus, the car dealer makes insurance purchase easy by bundling the policy with the deal. But the policy from the dealer can be expensive and you may get a better rate if you shop around.

Dealer insurance can be costly

For the insurer, a car dealer is a point of sale and the best placed to sell car insurance. Remember that third-party insurance—which insures you against damages to a third person or property due to your car—is mandatory for all plying vehicles, whereas the own damage cover—which insures your vehicle against theft or damage—is recommended. So, what the dealer typically sells is a comprehensive car insurance policy, consisting of these two covers.
Given that third-party insurance is mandatory and that it is much easy for the dealer to sell the policy, the market practice has been to compensate dealers for the sale, even if they are not licensed insurance distributors. These pay-outs often get passed on as infrastructure and marketing expenses. “Car manufacturers, especially the big companies, run insurance programmes where they tie up with the insurer and dictate aspects such as servicing and claims apart from premiums and payouts that get passed on to the dealers in the form of various expenses,” said Mahavir Chopra, director-health, life and strategic initiatives, “While some manufacturers will enrol an insurance intermediary, others negotiate directly with the insurer. The mark-up on the policy as decided, is passed on to dealers, who probably make more money through the sale of insurance than they do through selling cars,” he added.
Even though rules allow commission of up to 10% of the premium (of own damage cover)—to be increased to 15% from financial year (FY) 2018—insurers tend to overpay. “The overall payment to dealers or insurance intermediates who have a tie-up with dealers or manufacturers can be as high as 40%. For the customer, this means paying higher premium than if they had bought the insurance elsewhere,” said Kapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd.
This is not unknown to the insurance regulator. It has in the past fined insurers for overpaying intermediaries and paying commissions to unlicensed car dealers for soliciting insurance.
We looked through some of the penalty orders issued by the insurance regulator to understand the extent of extra payouts. One penalty order noted that the insurer was directly booking business through a car dealer and paying up to 40% of premium towards commission and infrastructure expenses. Another noted that an insurer had close to 400 motor dealers on its roll and none of them were licensed insurance intermediaries. The insurer had allotted intermediary codes to motor dealers and made payments towards commission.
To address this issue, the Insurance Regulatory and Development Authority of India (Irdai) had constituted a committee in November 2015 to study the existing practices in payouts to motor dealers and bring transparency, among other things. According to an official who worked on the report but didn’t want to be named, it was submitted to the regulator about 6 months back.

What should you do?

Start by asking the price of insurance. “It’s important that dealers show the cost of insurance as a separate cost head in the invoice, along with the insurer’s name, so that the customer knows the cost of insurance and can shop in the market,” said Mehta.
The next step is to go online and compare policies. There are many online portals which you can use to compare prices. In fact, the industry is already seeing cost conscious customers actively seeking the online medium to compare and buy policies, said Pushan Mahapatra, managing director and chief executive officer, SBI General Insurance Co. Ltd.
While you may not get a better rate from the same insurer, you can shop for a cheaper policy. “Insurers have tie-ups with car manufacturers that dictate the price of insurance. This becomes the market rate for that car. However, an insurer who doesn’t have a tie-up may offer a much cheaper rate for the same benefits,” said Mehta.
Here are some examples shared by a web portal: car insurance for a Honda City in Delhi was about Rs35,000 at the showroom whereas in the market it costs about Rs26,000. Insurance for a Mahindra XUV costs around Rs75,000 in the showroom and about Rs46,000 in the market.
So what do you do if you find a policy that’s cheaper than the one given by the dealer? “Once you get the basic car details and invoice from the dealer, go online and shop,” said Chopra.
“You can buy the policy by giving details of yourself and your car such as engine and chasis number. The policy will be emailed to you. You need to send a copy (of this policy) to your dealer, who will get the car registered,” added Chopra.
So the next time you go to buy a car, don’t settle for the car insurance that the dealer offers. Ask and compare to see if there is a cheaper deal available in the market.