India’s Insurance Regulatory Authority has solicited stakeholders’ views to again allow general insurers to issue long-term comprehensive two-wheeler and personal auto insurance policies.
The Indian Insurance Regulatory and Development Authority (IRDAI) has proposed to allow non-life insurers to issue a comprehensive/packaged five-year self-injury cover for two-wheelers or three years for personal vehicles that are concurrently linked to third-party liability insurance.
There are two parts to a comprehensive/package vehicle policy – first party damage (covers accidental damage, theft, etc. to the vehicle) and third party liability (the vehicle owner’s liability to third parties).
While liability insurance is required by law, coverage for the vehicle or personal damage portion is optional.
The Supreme Court ruled in 2018 that all new two-wheelers and private cars should have liability insurance for three and five years respectively.
The IRDAI then also allowed insurers to issue three/five year covers for own damage.
However, in 2020, IRDAI had eliminated long-term coverage for self-damage for the following reasons:
(a) Actuarial pricing has been a challenge for insurers;
(b) A large proportion of vehicle owners are unable to afford the long-term package policies due to high upfront payments;
(c)possibility of forced sale of long-term policies when vehicles are purchased on a hire-purchase basis;
(d) Vehicle owners who are encumbered with the policy over the long term even if there is a lack of service;
(e) No Claim Bonus structure which is not consistent among insurers causing confusion and dissatisfaction among policyholders.
IRDAI is silent as to what prompted them to again allow insurers to sell the long-term package policies or how the above reasons have now become inappropriate.
It has been proposed to allow general insurers to issue a long-term first party policy for a period coinciding with liability insurance when a stand-alone first party policy is renewed.
According to a senior industry official, vehicle buyers will still have the option to take out one-year first-party coverage, while long-term third-party coverage will be mandatory under the Supreme Court order.
The IRDAI has stated that long-term policy pricing should be based on sound actuarial principles, claims experience, less anti-selection, reduced policy administration and acquisition costs with higher renewal rates, long-term discount and NCB level expected at end of policy period and applicable government taxes etc.
“The depreciation rate applicable to the agreed IDV (Insured Declared Value or Sum Assured) may not exceed 10% per annum during the contract period,” IRDAI said.
The premium for the entire term of the insurance cover is charged at the time the insurance is taken out. But the premium for the year is only recognized as income and the remaining amount is treated as a “premium deposit” or “advance premium,” IRDAI said.
However, insurers will derive sizable investment returns from upfront premiums, which do not appear to be taken into account when calculating premiums for long-term policies.
IRDAI has asked stakeholders to submit their views by December 22nd.