PremiumNEW DELHI: When it comes to motor insurance in India, every driver has to carry at least a minimum of a third-party insurance policy, as per the Motor Vehicle Act. To drive a vehicle without insurance is a punishable offence.
The law was drafted and brought in effect to safeguard the interest of a third party that suffers injuries or property damage due to an accident with the involvement of an insured vehicle. However, the own-damage insurance cover is optional, while the personal accident cover is necessary only for the owner-driver of the car.
In this piece, we will look at how will the new bumper-to-bumper insurance of the vehicle impact the consumer wallet?
What is the new vehicle insurance order?
The Madras high court, in a judgement, has said all vehicles sold in Tamil Nadu after 1 September 2021, must be sold with a compulsory bumper-to-bumper insurance cover every year in addition to personal accident cover for all the occupants including the owner, driver, and passengers of the vehicle for straight five years.
Ankit Agrawal, CEO and co-founder, InsuranceDekho.com, said, "The ruling is expected to make vehicle owners pay heed towards the interest of driver, passengers, and third parties along with themselves. It may also avoid unwanted liability being levied on the owner of a vehicle since at present, bumper to bumper is optional, and there is provision to elongate it beyond five years."
Pranav Srivastava, partner, Phoenix Legal, said the high courts in India, when exercising writ jurisdiction, do have extra-territorial/ pan-India powers, i.e., powers to issue directions, orders or writs to persons, authorities or governments located outside the territorial jurisdiction of the said courts. "However, in the present case, the Orders have been passed by the High Court of Judicature at Madras while exercising civil appellate jurisdiction and not the writ jurisdiction. Also, the Orders only direct the transport department in Chennai to ensure compliance and arrays the Transport Department, Chennai and the Joint Transport Commissioner, Chennai, as parties. Therefore, in our view, the Orders will not have a pan-India application and will apply only to the State of Tamil Nadu," said Srivastava.
Impact of mandatory bumper-to-bumper insurance on customers
The order pronounced by the court will directly impact the insurance sector as well as customers in Tamil Nadu.
"To understand the effect, firstly one needs to know the importance of motor insurance. It is the second-largest business segment of the insurance industry that contributes around 40% of the total premium collected by the general insurance companies, in which approximately 41% of the premium share comes from the own-damage insurance cover that the court has made mandatory," Agrawal said.
"Besides, at present, almost 65-70% of the two-wheelers running on the roads avoid the possession of own-damage policy by the second year, while approximately 20% to 30% of the four-wheelers tends to shun the owning of own-damage policy by the fourth year. It shows the scope of coverage lies under this own-damage insurance cover," he said.
Industry experts anticipate that the new rule may push up cost of vehicle purchases 8-10%. For bikes, this may rise by ₹5,000-6,000, for entry-level cars by ₹50,000, and SUVs by more than Rs2 lakh. The rise in prices can make customers pay up to Rs1,000 more as down payment for two-wheelers, Rs10,000-12,000 more for four-wheelers. Overall this order will make car prices dearer by Rs50,000 to Rs5 Lakh, as per car dealers and experts.
Agrawal said, "Currently, the price of a one-year insurance policy costs around 3% of the car's value. But, post court's decision, the car dealers will have to sell vehicles with 5-year mandatory bumper-to-bumper insurance that will enhance the vehicle prices which can bring a massive upfront expense for customers."
The domestic insurance sectors has been adopting measures to provide flexibility to customers to ease their insurance experience. Many companies offer per month payment options based on the policy to help customers purchase a policy without affecting their budget, but the revised law can impact the monthly payments too. The move is expected to be counterproductive and might end up curbing the volume of car and bike sales since it can put extra burden on customers' pockets.
Some car marketers assume that the decision could also against the holistic perspective of the auto sector, while a few feel that in such a scenario, the Insurance Regulatory and Development Authority of India (IRDAI), should modify the premium structure to provide some relief to customers as it did in 2020 by ordering the withdrawal of compulsory long-term insurance for new vehicles. "Based on the facts, it is validated that this decision can hit the customer's pockets badly and might change or delay their vehicle purchasing decision, which could cause trouble for the auto industry," said Agrawal.
