In a bid to lower the cost of insurance for vehicle owners, ease the confusion over the myriad of options and avoid mis-selling of expensive bundled-up offerings by insurance companies, IRDAI has withdrawn the long-term own-damage (OD) insurance option with effect from August 1. Essentially, a customer can now buy a five-year third-party (TP) cover for new two-wheelers and three-year TP for cars, along with a one-year policy for OD cover. The long-term package that offered both three-/five-year OD and three-/five-year TP cover, will no longer be available (from August 1).

While many insurance companies were offering attractive long-term packages at discounted premiums, shelling out hefty premium (particularly in case of high-end cars), ambiguity over how no-claim bonus was being factored in and lack of flexibility (locked in with one insurer for long term), had made it difficult for customers to choose from the plethora of options.

While IRDAI’s move simplifies the choice for a customer, it puts the onus of taking adequate OD cover and renewing it every year on the vehicle owner.

What’s changed?

Motor insurance has two components — a third-party cover and an own-damage cover. The former is mandatory and covers the legal liability arising out of damage to a third party or bodily injury or death. OD is optional and protects the vehicle against damage or theft. TP rates are decided by IRDAI and are fixed across insurance companies (for a particular vehicle), while insurers have the flexibility to decide on the OD cover premiums.

Post September 2018, a customer buying a new vehicle had to mandatorily take a long-term TP cover ― five years for two-wheelers and three years for cars (pre-September 2018, TP cover was bought for one year at the time of purchase of the vehicle).

But since OD is always optional, a customer could either skip it all together or take OD cover for just one year or a longer term. Hence, a customer currently has three options: a) Three-/five-year TP cover, b) One-year OD plus three-/five-year TP, and, c) Three-/five-year OD and three-/five-year TP.

According to IRDAI’s circular, the third option will not be available in case of purchase of new vehicles from August 1. This essentially means that you can either take a long-term TP with a one-year OD or just a long-term TP cover.

Good or bad?

The intention of the regulator earlier to allow insurers to offer a package that covered both long-term TP and OD damage was to induce people to take adequate OD covers. Given that OD is optional, many people often skip it to save costs. Even when people opt for one-year OD and long-term TP, they often miss to renew the OD cover every year. To improve penetration and ensure that people are properly covered on OD, the regulator had allowed insurance companies to offer the long-term package on TP and OD cover.

Many insurance companies too, on their part, had offered attractive discounts on long-term packages. In many vehicles (depending on the model), while for a two-wheeler, the five-year OD cover costs about 3-3.5 times the cover for one year, in the case of car, a three-year cover works out to about 2-2.5 times.

Hence, on the positive side, the long-term packages removed the hassle of renewing the OD cover every year. In some cases, the premium costs too, worked out cheaper.

But there were several other hitches in such policies.

One, these policies come at hefty premiums, particularly in case of high-end cars. For instance, according to policybazaar.com, in case of the Creta 1.6 E Plus Petrol (1,591 cc) 2020 model, with an IDV of about ₹9.5 lakh, HDFC Ergo charges a premium of ₹37,379 (excluding GST) for one-year OD plus three-year TP policy. For a three-year OD plus three-year TP, the premium charged by HDFC Ergo increases to ₹64,834. Usually the premium cost gets financed (with the vehicle loan), which induces people to go for the long-term policy.

IRDAI states that aside from affordability issues, the possibility of forced selling of such policies due to vested interests or linked to loans, has been an issue. This is one of the reasons that the regulator has cited for withdrawing the long-term package.

The second issue with long-term policies is the no-claim bonus.

A no-claim bonus is the discount in the premium (only on OD premium) offered to a vehicle owner, if he has not made any claim during a policy year. Earlier (before Sept 2018) since the OD cover was taken only for only one year, one could get the benefit of no-claim bonus when the policy is renewed.

In a long-term OD cover, claiming the no-claim bonus was an issue. Here, insurers assured that they build in the no-claim benefit into the premium right at the start. Since this was difficult to ascertain, it always made sense (for a good driver) to opt for a one-year OD cover and take the benefit of no-claim bonus over the years, rather than locking into a long-term OD policy.

IRDAI too, has cited the ambiguity over no-claim bonus as one of the reasons for withdrawing the long-term OD option. So now, with only a one-year OD option available (from August 1), you can continue to get the benefit under no-claim bonus every year at the time of renewing your OD cover.

IRDAI’s move also provides you more flexibility to switch to another insurer (for OD) after a year. In a long-term package, the key issue was that a person was stuck with an insurance company for the long term.

Bottomline

While you may lose out on some long-term attractive deals offered by insurers earlier, IRDAI’s move reduces a lot of confusion over long-term OD policies and simplifies the choices for you. As such, insurance companies will continue to offer standalone OD cover policy at attractive premium rates. Hence, remember to take an OD cover and renew it every year to ensure that your risks are adequately covered.

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