LONG-TERM MOTOR POLICY

1. Context

The Insurance Regulatory and Development Authority of India (IRDA) has proposed long-term insurance coverage for cars, two-wheelers, villas, and residential complexes in a move to offer wider choice and convenience to customers.

2. Long-Term Motor Policy

The regulator has allowed general insurance companies to offer motor insurance for three years to private cars and five years to two-wheelers.

3. New Draft Of IRDAI

• The insured declared value (IDV)or sum insured agreed to by the policyholder, premium  and add-ons should be mentioned in the policy schedule
• The depreciation rate on the IDV should not exceed 10% per annum during the policy period and the premium for the entire term of the policy coverage should be collected at the time of the sale of insurance.
• The no-claim bonus grid specified for 1-year own damage (OD) policies would also be applicable for long-term policies, the NCB applicable at the end of the tenure for long-term policies would be the same as would have been earned if such policies were renewed annually.
• IRDAI has proposed to allow insurers to offer fire and allied peril cover for 30 years with a sum insured of Rs 5 crore and more to standalone residential houses, villa complexes, and apartment blocks that are managed by housing cooperatives or any other body representing homeowners.

• In respect of risks with sums insured up to Rs 5 crore for offices, hotels, and shops, the duration should not exceed 5 years.

4. Pros of the Product

• Buying long-term products means one does not have to renew the policy every year.
• By paying upfront, one can protect against the rising cost of insurance products. One can also demand discounts from insurers while going for long-term products.

5. Cons

• The increase in the upfront cost of owning a vehicle.
•  By paying a premium for five years in one go, a customer will miss for five years in one go, and a customer will miss out on any reduction that may happen due to market factors such as increased competition.
• An individual who sells the vehicle after a year or two will find it difficult to recover the premium amount paid for the years in which she would no longer be the owner.

6. Challenges

• The package policy may face challenges in distribution on account of affordability among vehicle owners.
• There is also a possibility of forced selling by financial institutions to customers who buy vehicles on loan.
• The structure for NCB was not uniform across insurers and caused dissatisfaction among policyholders.

7. Possible Exit Option

• IRDAI has now proposed that every policy should have a 30-day free look period from the date of inception to enable the holder to review the terms and conditions.
• An option to cancel has been proposed and the policyholder would be entitled to a refund of the premium on a pro–rata basis for the free look cancellation option.

8. Reasons For The Move

• In 2018, SC appointed committee observed that nearly 66% of on-road vehicles were uninsured.
• In accidents involving these cars, the victims’ had to spend from their pockets or use their insurance to pay for damage that was not their fault.
• Also who died did not get adequate compensation since the vehicle wasn't insured.
• The court made it mandatory for new vehicles to buy long-term bundled insurance -3 years for four-wheelers and 5 years for two-wheelers –to eliminate this problem.
• Also, natural calamities like floods, earthquakes, and cyclones lead to huge losses to the public as homes and shops are destroyed. More than 90% of dwellings in India are not insured.

For Mains  

Source –Indian Express