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POLICY WATCH : NEW DRAFT GUIDELINES ON MOTOR INSURANCE


1. INTRODUCTION

Insurance regulatory and development authority of India (IRDAI) has proposed changes in structure of motor insurance policy.

In draft IRDAI says that for new cars upto 3 years the sum insured would be the on road price that policyholder paid at the time of buying the vehicle. Which means upto 3 yeara no depreciation will be applicable.

After 3 years there will be gradual depreciation depending upon the age of the vehicle.


2. BACKGROUND

Earlier and till today the rules formed by IMT (Indian motor tariff) are prevailing which were last revised in 2002. Which is long ago. IRDAI formed a 7 member committee to propose draft changes.


3. INSIGHTS

• Depreciation and sum insured calculations are made easy and simple to comprehend.

• A key component of the changes is that now vehicle based depreciation is proposed as opposed to parts based depreciation. Which means vehicle as a whole will be considered as one single unit.

• Various parts like rubber, metal and glass etc. Were considered separately which caused confusion among policyholders.

• It was necessary because with advance of new technology we see composite parts like fiber and other categories.

• This step sill reduce confusion and make policies more transparent.

• Moreover formula for deciding price and depreciation was laid down almost 15 years back and needed revision.

2 • The purpose of Insurance policy is to place a person in the same position where he was before the lose. But due to certain ambiguity it doesn’t happen.

• In this regard IRDAI has proposed that with private cars for the first 3 years, No depreciation will be applicable in case of OD(own damage). So, the sum-insured will be the original on road price paid by the policyholder. Between the 3rd and the 4th year, depreciation of 40 percent will be applied. This will increase to 60 percent.

• Depreciation means the amount by which the value of a thing reduces every year. This is because the parts of the vehicle are subject to wear-and-tear with time.

• For two-wheelers, the sum-insured would be 95% of the original on road price for 6 months after the purchase. This will reduce to 90% till the bike is 1year old and, after that, 40% once it is 7 years old. After 7th year, the sum-insured will be mutually decided value between the vehicle owner and insurer.

• One more different kind of model has also been proposed that will be similar for all vehicles. Under this the sum-insured will vary from 95% of the vehicle’s price for 6 months from purchase. This will reduce yearly to 30% for vehicles that are15 years old.

• Interestingly, to promote driving behavior which is a cause of concern IRDAI has also proposed ‘named driver' policy. Which states that a person will be named as driver of the vehicle in the policy. And claim will be granted only when that person was driving the vehicle at the time of accident.

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