SIMPLY PUT. How your insurer arrives at rate of depreciation

Two neighbours’ daily routine of watering plants leads to an interesting conversation.

Sindu : Adding new pots to your garden?

Bindu: Yes. I bought them from Bandu. Though the mud is good and the pots are in good shape, I had to pay a hefty sum for them. More than the price at which she must have bought them I’d say!

Sindu: Well, that is business.

Bindu: I wish this applied to everything I sold... like the other day, I sold my bike for a price nearly 80 per cent lower than at which I bought it.

Sindu: Well, that’s how it works! The new car you purchased a few weeks back, too will be purchased for a value far lower than its market value. Even your insurer will settle claims at a value lower than the purchase price.

Bindu: What! Why is that?

Sindu: Because, insurers take depreciation of a vehicle into account before making the claim payment. This is so, even for new vehicles. In motor insurance, this is termed as insured declared value or IDV. It is the monetary value of a vehicle as fixed by an insurer and equals the current market value of your vehicle after deducting depreciation. It is the maximum sum insured (amount payable) for your vehicle, in case of partial/total loss or theft. In other words, it is the amount that your car could fetch in today’s market, if you were to sell it.

Bindu: What factors go into IDV?

Sindu : To arrive at the IDV, insurers consider details such as the date of registration, make and model, and the actual price of the vehicle is adjusted for depreciation.

Bindu: So many things! Wait, how is the rate of depreciation arrived at?

Sindu: The rate of depreciation depends on the age of the car. In case of a new car, IDV is usually calculated based on the manufacturer’s listed ex-showroom price, minus 5 per cent depreciation. For vehicles that are more than five years old, IDV is calculated based on the vehicle’s assessment by surveyors from the insurance firm.

Bindu: Okay. So why should I pay attention to this value?

Sindu: The insurance premium for a vehicle is calculated as a percentage of the IDV. Normally, insurers disclose the IDV calculation on their respective websites and in the policy document. Say, your vehicle is one year old. Then your depreciation would be around 10-15 per cent and this will be used for arriving at the IDV. Higher the IDV of your vehicle, higher your premium and vice versa.

Bindu: I’ll just quote a low IDV and save on the premium.

Sindu: Yes. But at the time of claim, you will bear the brunt of it..

Bindu: How so?

Sindu: At the time of a claim, the amount is paid out based on the IDV of your vehicle which is based on the age of the vehicle, model and kilometres it has run and so on. So, if you under estimate your vehicle value to save on premium, your claim amount too is lowered. This is one of the most crucial factors to keep mind when getting your car insured, so that in times of need you receive the right amount of compensation.

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