Car Insurance - Overview

Team CrawFin/ Harshal Jawale, CFP^CM

Automobile market in India is zooming month after month. At some point we all wish to purchase a car which still is a status symbol all over the world. Although the purchase price of it gradually coming down as most car manufacturers are making India as a hub; it is its overhead costs like fuel, maintenance, several taxes, insurance and last but not the least parking makes it unaffordable at times. In this article I am trying to give general idea about car insurance policy.

It is mandatory to have car insurance under the Motor Vehicles Act 1988 to get your car insured as soon as you purchase it. Insurance annual premium usually is in the range of 2-3% of the IDV of your car.

There are two types of car insurance: Third Party Insurance and Comprehensive Insurance

Third party insurance protects a policy holder against losses which arise due to bodily injury/death to a third party or any damage to its property. Meaning if you as a driver hit anyone or anyone’s property then this insurance cover pays for the damages claimed. It is mandatory by law to have third party insurance.

However this insurance doesn't protect you against losses which arise due to bodily injury/death to you, your vehicle and co-passengers. If you want to be compensated for any damages to you, co-passengers and your vehicle in addition to third party coverage, then you need to purchase comprehensive car insurance. Comprehensive car insurance policy is better as it provides both third party coverage and damages/loss to one's own vehicle, co-passengers or self.

Insurance companies have historical data to understand trends in accidental claims. The pricing is based on car make, model, year, place of registration etc. Car insurance premium is based on market opportunity, risk assessment and claims experience of the insurance company. There are other factors that affect discounts on the base premium they are channel for buying insurance, the vehicle and your profile.

If the car insurance buying process were transparent, it would be easy for customer shopping for it. There exists difference in premiums offered from different sourcing channels. The customer has no way of knowing where the best rate can be obtained.

1. Car dealer - Most customers rely on insurance offered by car dealers, but it may not be optimum premium rate. For new vehicles car manufacturers does not want variation in pricing, they usually offer large discounts because new car buyers do not shop around for insurance and are gullible targets. At the time of renewal car dealer may not be able to offer similar kind of discounts. 
2. Insurance broker – they are an option for an unbiased view on insurance products from different companies. Since they tied up with many insurance companies, they will not sell you a particular company policy for their own benefit.
3. The insurance company agent can give you quote for one company but it will be tedious to call numerous agents to get comparative rates.
4. Purchasing from websites like policybazaar.com is not easy either. In motor insurance channel conflict is common: there are different discounts offered through different channels like Car dealers/ agents/ brokers, hence transparency is not appreciated by the insurer. They are also reluctant to share premium rates with third party like policybazaar. Also car insurance premium change frequently so a website may reflect recent rates.

Of all the intermediaries mentioned above the one who gives higher business and recognized as profitable one, may have small advantage in terms of rates.

According to me customers give undue importance only to one aspect namely premium. Since the differential amount is not high they need to understand who will support them the best at the time of claims; an agent who may have served them for years or it may be a car dealer who gives good service to the vehicle.

Unlike Health insurance and Life Insurance, auto Insurance is price-sensitive as the No-claim bonus (NCB) can be migrated easily to new insurer.

Some points to note –

• Expensive cars usually carry higher discounts as they are driven by chauffeurs or experienced drivers. Vehicles used for rental carry higher premium.
• Petrol cars usually attract lower premiums than diesel/ CNG/LPG cars. Data says diesel cars clock higher usage also diesel engines have higher maintenance and repair cost.
• Locks, airbags, anti theft devices help reduce premium.
• Disclose your claims history when you change your insurer. New insurer will provide policy with not much efforts but at the time of claims they make verification with your previous insurer and reject the claim in case of discrepancy.
• Do not manipulate IDV of your car to reduce insurance premium, it reflects the resale value of your car and plays important role in case of damages.
• The insurance contract is still for vehicle and not for driver; customers with clean record are subsidizing those with bad records. Premium rates are determined only on the basis of vehicle make, year etc and offers no benefits for clean driving except no claim bonus.

There are many Insurance companies that offer motor insurance in India. Some of them are ICICI Lombard, HDFC Ergo, Bharti AXA, United India, The New India Assurance, National Insurance, Iffco-Tokio, Reliance General, Bajaj Allianze, Tata AIG, Future Generali, Shriram general insurance, Royal Sundaram.

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