Are you planning to buy a new car this year? Get ready to pay more upfront for motor insurance. From September 1, the Supreme Court has made it mandatory to buy insurance cover for new cars and two-wheelers for at least three and five years, respectively. This means, the cash outgo during the purchase of a new vehicle will go up. However, you shall be exempted from annual premium payouts.
Car owners would get three variants of motor insurance policies each for two- and four-wheelers to choose from.
For the new two wheelers, buyers can get five-year long term standalone motor third party insurance policy, five-year long term motor package insurance policy or bundled policy, with one year coverage for own damage and five-year motor third party insurance policy.
Similarly, for four-wheelers, new buyers will have three options — three-year long term standalone motor third party insurance policy, three-year long term motor package insurance policy or bundled cover with one-year term for own damage and three-year motor third party insurance policy.
Here, it is important to understand what is third party insurance. As per the Motor Vehicles Act of 1988, motorists must mandatorily have a third party insurance cover. A third party (TP) is any party apart from the insured or the insurer. A third party insurance policy helps cover legal liabilities owing to death, damages, or injuries. However, it doesn’t cover damages to your own vehicle. For this, the vehicle owner needs a comprehensive coverage against own damage, which covers financial losses caused by reasons other than accidents such as floods, theft, robbery, fire, etc.
As per the Insurance Regulatory and Development Authority of India, policyholders will have to compulsorily pay a one-time single premium for three years for new cars or five years for new two-wheelers. So, at the time of purchase of the new vehicle, the owner will have the option to either buy a long-term package cover offering both motor third party insurance and own damage insurance for three years or five years or get a bundled cover with a three-year or five-year term (as applicable) for the third party component and a one-year term for own damage.
Before we decide whether to choose a bundled option of a standalone one, let us understand the difficulties that we may face in this new third party insurance policy.
The biggest challenge is that there are no standalone own damage policies.
The other complication is that even if there are standalone own damage policies, they may not be in sync with the third party insurance. For example, assume you have a third party cover for three years and own damage cover for one year. At the end of one year, you need to renew your own damage cover. Say, you forgot to renew your own damage cover and the policy lapsed before you renewed it again. If you renew it 15 days after it lapses, i.e., 45 days after your policy ends, there would be two different deadlines you would need to track, making compliance even more cumbersome once the original policy ends.
For the insurance company, the premium would be recognised on yearly basis by insurance companies. The first year’s premium amount would be treated as yearly premium (income for the insurance company) and remainder as advance premium or premium deposit.
The author is CEO, BankBazaar