How to get the best deal on your motor policy

Are you looking to buy a motor insurance policy for your new car? Then take stock of the regulatory change that came into effect over a year back, that has changed the way you need to assess motor policies offered by various insurance companies.

In September 2018, mandatory long-term third party (TP) insurance kicked in, requiring customers to take mandatory five-year TP cover for new two-wheelers and three-year TP for cars. While the intense competition among insurers offering these policies has worked in favour of customers (by way of attractive premiums), it has also led to a lot of confusion owing to the several combinations available in the market.

Here, we explain the implications of the regulatory tweak and list out key factors that you need to keep in mind while picking your motor insurance policy.

Multiple options

Motor insurance has two components — a TP cover and an own-damage (OD) cover. The former is mandatory and covers the legal liability arising out of damage, or bodily injury or death, to the third party. OD is optional and protects vehicle against damage or theft.

Post September 2018, a customer buying a new vehicle has to mandatorily take a long-term TP cover — five-year for two-wheelers and three years for cars (earlier, TP cover was bought for one year at the time of purchase of the vehicle). But since OD is optional, a customer can either skip it all together or choose to take it for a year or longer.

Hence, if you are buying a new car now, essentially, you have three options: (a) You can go for just a three-year TP cover; (b) You can opt for a one-year OD plus three-year TP; and (c) You can go all the way and buy a three-year OD plus three-year TP.

Which one should you go for?

The first option is never a good idea. Given the increasing instances of road accidents, it is always prudent to take an OD cover along with the mandatory TP cover. Among the other two options, there are two key factors that you need to consider. One is the premium amount and your ability to pay. The other is the no-claim bonus.

One-year or long-term OD?

It is important to note that TP rates are decided by IRDAI and are fixed across insurance companies. The regulator has increased TP rates across segments effective June 16, 2019, and hence this portion of your premium has gone up over the past year.

But insurers have the flexibility to decide on the OD cover premiums. Hence, it is the OD premium that is the differentiating factor in your overall cost.

At first glance, it may seem that taking a three-year OD cover for your new car would cost you thrice the amount as a one-year cover. But this may not be the case always. In fact, leading insurance players say that for a two-wheeler, the five-year OD cover costs 3-3.5 times the cover for one year, while in the case of cars, a three-year cover works out to 2-2.5 times.

A BusinessLine analysis based on data available from policybazaar.com suggests that while in some cases taking a longer OD cover may be more cost-effective, in others the difference may not be much. For instance, in the case of Maruti Swift VXI petrol (1298 cc), with an insured declared value (IDV: essentially the maximum amount the insurer will pay you in the event of a total loss claim) of ₹4,12,623, New India Assurance charges ₹6,773 for the one-year OD cover (and ₹9,534 for the three-year TP cover). But it charges ₹17,468 for a three-year OD cover, which is 2.6 times (not thrice) the one-year OD premium. However, in the case of say the Creta 1.6 E Plus Petrol (1591 cc) 2020 model, there doesn’t seem to be much of an advantage in taking a three-year OD cover by way of overall cost.

Hence, compare the options for the particular model or car that you intend to buy, to check the difference in premiums.

Affordability, no-claim bonus

Let us assume that the three-year OD cover is more cost-effective than one-year OD. Should you go for it?

You will have to consider whether you are able to cough up the hefty premium (more so in the case of cars). For instance, according to data provided by policybazaar.com, in the case of the Creta 1.6 E Plus Petrol (1591 cc) 2020 model, with an IDV of ₹9,50,000, HDFC Ergo charges a premium of ₹37,377 (excluding GST) for a one-year OD plus three-year TP policy. For a three-year OD plus three-year TP, the premium it charges increases to ₹64,828. While this is a significant bump-up in premium outgo, the cost generally gets financed (with the vehicle loans). So decide on the tenure of the OD cover after weighing all these factors.

The other important point to look at is the no-claim bonus.

A no-claim bonus is the discount in the premium (only on OD premium) offered to a vehicle owner if he/she has not made any claim during a policy year. Earlier, since the cover was taken for only one year, you would get the benefit of no-claim bonus when you renewed your policy. If you did not make any claims for a few years consecutively, you could accumulate up to 50 per cent discount on OD premiums (by the end of five years of making no claim).

So what happens to the no-claim bonus now, if you take a long-term OD? Insurers say that they build in the no-claim benefit into the premium right at the start.

But if you are a good driver and believe that you can earn more through no-claim bonus over the years, you can opt for a one-year OD and renew it every year rather than locking into a long-term OD policy.

Renewing existing policy

So let us assume that you bought your vehicle after September 2018 and decided to go for a one-year OD plus three-year TP cover option. Then you will be looking to renew your OD cover again this year. Insurance companies have started issuing standalone OD policy from September 2019. Competing aggressively in this segment, premium rates offered by various insurers look very attractive. For instance, in the case of Maruti Ciaz Sigma (1462 cc), the OD premiums in the case of standalone cover (see table) offered by New India is ₹7,744.

Hence, if you missed taking an OD cover last year, be sure to take one this year. With insurers offering attractive standalone OD covers, it would be ‘penny-wise pound-foolish’ not to.

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