Long-term motor insurance! What does IRDAI's new proposal mean for you?

You might soon be able to buy a long-term motor insurance policy as the Insurance Regulatory and Development Authority of India (IRDAI) has proposed to allow all general insurers to offer long-term motor insurance policies in order to give wider choice to policyholders. The regulator has proposed 3-year policy in respect of private cars and 5-year in respect of two-wheelers - co-terminus with Third Party (TP) Liability cover.

A comprehensive motor insurance policy consists of two parts - own damage and third-party insurance. Own damage part covers the car from damages caused due to accidents while third party insurance covers one from damages caused to a third party.

"It’s a good move to develop longer-term products, as it leads longer-term engagement with customers and reduces hassle at both ends," says Suresh Agarwal, Managing Director & CEO, Kotak Mahindra General Insurance.

According to the IRDAI’s circular, pricing of long-term policies is to be made based on actuarial principles considering all the relevant aspects of rating including claims experience, lower anti-selection, reduced policy administration and acquisition costs given higher renewal rates, long-term discount, expected NCB level by the end of the policy period and applicable government taxes, etc. The pricing of add-on and optional covers may likewise consider the cost efficiencies of policy administration. Moreover, the depreciation rate to apply on the IDV agreed shall not exceed 10% per annum during the policy period.

IRDAI, however, earlier withdrew the long-term motor insurance package policies in August 2020. The long-term policy was first introduced in September 2018 offering no premium changes and no inspection for three years. But later IRDAI decided to withdraw this plan. According to IRDAI’s circular, insurers had problems in actuarial pricing for the long-term own damage cover. The affordability among vehicle owners was another reason. 

Separately, the finance ministry has invited comments from stakeholders on the proposed changes in the Insurance Act, 1938 and Insurance Regulatory and Development Authority Act, 1999. The proposals include that no insurer shall commence insurance business unless it has a minimum paid-up equity capital as may be specified by regulations. Minimum capital is to be specified by the regulator considering the size and scale of operations, class or sub-class of insurance business and the category or type of insurer. Currently, paid-up capital of Rs 100 crore is required to start a general, life or standalone health insurance business, and Rs 200 crore is required to start a reinsurance business.

Ankur Nijhawan, CEO, AXA France Vie—India Reinsurance Branch, says “The changes proposed by the Finance Ministry to the IRDAI & the Insurance Act will enhance penetration of insurance companies further, even for those that are small in size and scale, like the mono and micro insurers. This is indeed a liberalising move, considering that the country has a large chunk of uninsured population. Additionally, the concept of captive insurer has been introduced, which will aid many companies that are currently self-managing their risks. This move will not only help insurers improve their risk management capabilities but would also increase insurance bucket premiums, create job opportunities, and drive overall growth of the insurance sector.”

Nijhawan adds another significant point, which is that insurance is currently sold as a risk transfer instrument, but actually it is a service. As per the proposed changes, insurance companies can offer other services bundled with their products. Corporate licenses are also there in many other countries, where life and health insurance are sold together. Till the time there is only one insurance service provider involved, there is one company that is accountable. It makes things simpler for the end consumer.