Don’t skimp on premium; declare correct IDV of your car

It’s testing time for Indian consumers. Amid a sluggish economic growth and persistently high interest rates, the need to manage monthly budgets without compromising on essential amenities remains a daunting task. Even as one continues to face the challenge of rising cost of food items, another area that witnessed a price increase recently was motor insurance third-party premium. As per the new guidelines, third-party motor insurance premium, which forms an important component of your vehicle’s comprehensive insurance policy, has undergone an increase of 20% for private cars, 10% for two-wheelers and 10% for commercial vehicles.

Comprehensive insurance policy comprises two covers—own damage (OD) and third-party. OD covers loss or damage to vehicle against accidental damage, natural calamities and man-made calamities whereas third-party cover protects the insured against liability due to accidental damages resulting in the permanent injury or death of a person, and damage caused to the surrounding property. For premium computation, insured declared value (IDV) is considered for calculating OD premium whereas third-party premium is tariffed as per the vehicle category and has no relation to the IDV of the vehicle.

Even though premium rates have increased, there are ways to reduce your motor insurance premium, i.e. on the OD component. One can avail the no-claim bonus benefit, buy anti-theft devices or opt for voluntary deductible to avail a premium discount. However, at times, some customers tend to adopt not so favourable means. One of these is declaring or unknowingly accepting a lower IDV of the vehicle. This value is central to deciding the insurance premium of your vehicle, be it a sedan, a two-wheeler or a sports utility vehicle.

A lower IDV may help reduce your premium, but can lead to significant loss in case of a claim.

Let’s understand the concept of IDV. It’s considered as the sum insured and is fixed at the commencement of each policy period for each insured vehicle. IDV is arrived on the basis of the manufacturer’s listed selling price of the brand and model, and then adjusted with the standard deprecation rates as per Indian Motor Tariff. IDV is the maximum amount that an insurance company will pay in case of a claim, i.e. in the event of total loss (the vehicle is no longer capable of running on the road), constructive total loss (aggregate cost of retrieval and/or repair of the vehicle is greater than 75% of IDV) or your vehicle being stolen.

For instance, if your vehicle value or IDV is fixed for 4 lakh at the commencement of the policy, the maximum amount the insurance company will compensate you in case of total damage to vehicle or theft will be 4 lakh. It is important to note that compensation is given only in case of total loss, constructive total loss or in an event of theft of the vehicle within the policy period.

The rate of depreciation keeps increasing with the age of the car. A new car will fetch the maximum IDV but as the vehicle turns old, the rate of depreciation keeps increasing. To cite another example, a car not exceeding six months might be charged 5% depreciation rate whereas a car that’s four years old will be charged a depreciation of 40%.

The rate of depreciation is arrived based on a standard metric (on the basis of age of the vehicle). If the car is more than five years old, or is an obsolete model (i.e., a model not manufactured anymore), the insurer and the insured have to come to an understanding on it.

It is to be noted that at the time of first purchase as well policy renewal, current selling price of the brand and model is considered for computation of IDV and not the price at the time of purchase of the vehicle. For instance, if a customer bought a particular brand and model in April 2012 at 10 lakh and the current June 2014 selling price of the same brand and model is 11 lakh, the insurance company would consider the current listed selling price, 11 lakh, for computation of IDV.

If one declares a lower IDV than the reasonable market value and were to make a claim for total loss, one would receive a lower claim amount since the IDV declared was lower. A little saving on the premium by declaring a lower IDV can thus result in much higher loss in an unfortunate event of a large claim or theft of the vehicle.

At the same time, some customers tend to declare a high IDV assuming that the claim amount will accordingly increase or it can help them if they were to sell the vehicle in the market. However, it must be noted that IDV is the maximum possible claim amount that the insurer will provide depending on the type of loss. At the time of claim processing, the insurer will consider the age of the vehicle and hence its depreciation before finalizing the claim. As such, one may end up receiving a lower claim amount despite having taken a higher IDV, and paid a higher premium.

So, the next time you renew your vehicle insurance, make sure that the IDV declared is in sync with the vehicle age and model.

Neelesh Garg is executive director, ICICI Lombard General Insurance Co. Ltd