The Insurance Regulatory and Development Authority of India (Irdai) on 9 June asked all insurers to withdraw long-term packages offering both third-party (TP) and own-damage (OD) motor insurance, starting August.
In September 2018, Irdai, in line with a Supreme Court’s mandate, had asked general insurers to offer two options for motor insurance to potential buyers. They were asked to either offer a long-term comprehensive cover comprising both TP and OD insurance for three years or five years, or a bundled cover for three or five years for TP component and one-year OD cover.
A three-year TP cover was mandated for cars and five-year TP cover was mandated for two-wheelers. The current decision means that you can now buy a long-term TP cover but will have to renew the OD component every year.
For cars, you can buy three-year TP only or a three-year TP with a one-year OD cover.
In its circular, the regulator cited affordability of long-term policies, potential mis-selling, policyholders being confined to the same insurer and non-uniform no-claim bonus (NCB) structure as the reasons for withdrawing the provision.
“Affordability was a problem. It’s unrealistic to buy ‘five+five’ or a ‘three+three’ construct because it’s quite expensive for someone to pay upfront. The uptake was quite low too. In some instances, such long-term comprehensive products have also been forced on the customer. The other issue is that once you buy it, you’re stuck with the insurer for five or three years," said Animesh Das, head of product strategy, Acko General Insurance Co. Ltd.
Calculating the NCB benefit also became confusing for insurers. If you have a three-year policy, you get the benefit all at once when you renew the policy in the fourth year and not every year.
“In a long-term policy, you lose the yearly NCB benefit, which you would’ve otherwise got for annual renewal," said Naval Goel, CEO and founder, PolicyX.com, an online insurance marketplace.
For potential buyers who may be unaware of the option to buy OD cover on an annual basis or from a different insurer, this could have been a cause for mis-selling. With this move, the insurance regulator has tried to put an end to this. “These guidelines lend more clarity to customers and avoid exploitation of any loopholes," said Das.
So, choose your motor insurance carefully.