Changing Gears

The first dose of freedom is set to change the pricing of policies. For innovations, wait till 1 April 2008 when a free market will truly prevail.

Print Edition: March 8, 2007

The first dose of freedom is set to change the pricing of policies. For innovations, wait till 1 April 2008 when a free market will truly prevail.

Automobile Insurance

Free market policies are supposed to benefit consumers, right? Well, only partially. The post-detariffing changes in motor insurance policies seem to favour the consumer. But there are certain aspects that you must watch out for.

Under the new regime, insurers can fix premiums and introduce innovative plans for vehicle insurance. Only the mandatory third-party insurance remains untouched by the changes. Insurers claim that the mechanism for arriving at the new premium rates has been worked out after factoring in their experience of claims settlements over the years.

Within six months95% of cost
Six months to one year85% of cost
One year to two years80% of cost
Two years to three years70% of cost
Three years to four years60% of cost
Four years to five years50% of cost
After five yearsdiscretionary
Figures are % of the car price that you get from the insurance company in case of theft or total damage

However, this policy does not discriminate between the good and the bad. For instance, discretionary pricing means that anybody can demand—and be offered—a 10-20% discount on the premium. This discretionary discounting may lead to a situation where a reckless driver who gives a lot of business to an insurance company may be quoted a premium that matches what a good driver without claims may earn in three years.

So subjective is the premium pricing that two similar cars bought at the same time may attract different premiums. Says A. Sen Sarma, executive vicepresident, Iffco Tokio: “Pricing is under our control and it is free market pricing.” In other words, the insurer—who is expected to bear your risk for a price—has the right to charge you whatever he pleases.

This freedom to fix premiums is already having an impact. Earlier the car’s declared value, size, age and where it is driven defined the premium. The fuel used made no difference. Now, diesel cars have a higher premium than petrol cars.

The proposed sharing of information by insurance companies is a welcome step—but only if you are a careful driver. “Claims history will now be shared by insurance companies to determine the risk,” asserts Sarma. So, while good drivers can negotiate for a lower quote, someone who has made frequent claims will straightaway be slapped with a heavy premium.

Insurers also plan to introduce checks to find if the owner is actually using the insured car and his driving habits. Don’t expect a claim to be cleared if the car’s owner was not driving at the time of an accident.

The bottom line is that the new motor insurance policy protects the interests of insurers rather than of consumers. But don’t lose heart—this is the first step towards detariffing. When the general insurance market opens up further after 1 April 2008, true free-market conditions will prevail.

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