Introduction

The Indian insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), recently introduced changes to the regulations governing motor insurance in India. Under the Motor Vehicles Act 1988, insurance cover for third-party liability is mandatory for all motor vehicles at the time of purchase. However, until recently, this third-party liability insurance had a mandatory one-year cover term and had to be renewed by the policyholder each year.

The Supreme Court ruling in S Rajaseekaran v Union of India(1) has now clarified that long-term motor insurance must be introduced and made mandatory at the point of sale and registration. Following the issuance of this decision, the IRDAI has extended the term of statutory third-party liability insurance for new vehicles sold from 1 September 2018 to three years for private cars and five years for two-wheelers.(2) Indian general insurers were directed to file these products under the 'file and use' procedure with the IRDAI before 15 September 2018. This date was later extended to 15 October 2018 based on representations received from general insurers.(3)

Long-term motor insurance cover

Previously, motor insurance cover was offered as third-party liability and package policies. Package policies provided more comprehensive cover, including cover for damage caused by the insured (so-called 'own damage') and third-party liability insurance. The mandatory term for the third-party liability component of these policies has now been increased to three years for private cars and five years for two-wheelers.

From 1 September 2018, in addition to third-party liability cover and long-term package policies, policyholders may now purchase bundled policies. These bundled policies include one-year damage cover and three-year third-party liability cover for private cars or five-year third-party liability cover for two-wheelers, as applicable. Per the IRDAI's directions, general insurers must now offer the following motor insurance products at the time of purchase of a new vehicle:

  • long-term third-party liability policies;
  • long-term package policies; and
  • bundled policies (with one-year own-damage protection).

General insurers may also offer motor insurance add-on covers with the foregoing for a period co-terminus with that of the package product (ie, three or five years). Insurers have also been directed to take cognisance of the movement of the insured declared value over time for all relevant purposes, including underwriting, pricing and settling claims.

In line with earlier IRDAI directions, general insurers must ensure that the mandatory three or five-year third-party liability cover is available through online channels and continue to liaise with police authorities to enable the issuance, renewal and availability of said cover. General insurers must also advertise the availability of long-term motor insurance pursuant to the Supreme Court's directive in S Rajaseekaran.

Premium rates

The IRDAI prescribes the premium rates for third-party motor insurance. These rates are usually revised annually and published on the IRDAI's website. Since the term of third-party insurance cover has been extended, the IRDAI has introduced a new premium rate structure for third-party liability insurance, where the premium for the entire term (three or five years) will be collected at the point of sale.

Vehicle category

Existing premium rates

Long-term premium rates

Private cars

Not exceeding 1,000 cylinder capacity (cc)

Rs1,850

Rs5,286

Exceeding 1,000 cc, but not exceeding 1,500 cc

Rs2,863

Rs9,534

Exceeding 1,500 cc

Rs7,890

Rs24,305

Two-wheelers

Not exceeding 75 cc

Rs427

Rs1,045

Exceeding 75 cc, but not exceeding 150 cc

Rs720

Rs3,285

Exceeding 150 cc, but not exceeding 350 cc

Rs985

Rs5,453

Exceeding 350 cc

Rs2,323

Rs13,034

However, the premium collected will be recognised on a yearly basis. The premium for that particular year is to be treated as income, with the remainder considered a premium deposit or advance premium.

Cancellation of policy

Pursuant to the IRDAI's directions, third-party liability insurance cannot be cancelled by the insured or insurer, except where:

  • double insurance is in place;
  • the insured vehicle is no longer in use as a result of total loss or constructive total loss; or
  • the vehicle has been sold or transferred.

However, the IRDAI has not prescribed the manner or basis for calculating refunds when a policy is cancelled. Insurers have largely continued to follow the short-term scales for refunding balance premiums.

No claim bonus

A no claim bonus (NCB) is a discount on the own damage component for each preceding claim-free year, generally ranging from 20% to 50% of the premium, which the insurer offers at the end of each policy year. Per the IRDAI's directions, for long-term motor insurance cover, the NCB will apply only at the end of the policy term (ie, after three or five years).

Commission structure

The IRDAI has introduced a new structure for commission, remuneration, rewards and motor insurance service provider (MISP) distribution fees for long-term motor insurance policies.(4) Commission and remuneration for long-term motor insurance must be paid in the financial year in which the premium was booked by the insurer. Such payments are restricted to the gross written premium recognised for that year.

No commission, remuneration or rewards are payable to insurance agents or intermediaries for the distribution of third-party liability long-term policies. For bundled covers, the commission structure is as follows:

  • 15% of the own damage premium for new private cars;
  • 17.5% of the own damage premium for new two-wheelers; and
  • 0% for the third-party portion.

For package policies, commission has been capped at a reduce percentage of the total premium collected each year. The distribution fees payable to MISPs is marginally higher than the commission payable to insurance agents and intermediaries.

Enhancement of capital sum insured

Pursuant to the Madras High Court's decision in United lndia lnsurance Co Ltd v R Rekha,(5) the IRDAI has effectively amended General Regulation 36 of the India Motor Tariff 2002, which prescribed the sum insured and applicable premium for the compulsory personal accident cover for owner-drivers under liability only and package policies.(6)

Further, with the introduction of long-term motor insurance policies, general insurers must provide compulsory personal accident cover under bundled policies.

The IRDAI has now increased the minimum capital sum insured for motorised two-wheelers from Rs100,000 and private cars from Rs200,000 to a capital sum insured of Rs1.5 million for the single year policies, at a premium of Rs75 million per annum. However, for long-term motor insurance policies, general insurers can set the premium in terms of their existing pricing approach.

Comment

The IRDAI has notified these circulars pursuant to orders from the Supreme Court and the Madras High Court, and press reports indicate that the changes have been well received by the public. While the industry has also largely welcome these changes, the short timelines available for filing and implementation has led to widespread discussions on the logistical and product-level modifications required.

For further information on this topic please contact Celia Jenkins, Anuj Bahukhandi or Nimisha Srivastava at Tuli & Co by telephone (+91 11 2464 0906) or email ([email protected], [email protected] or n[email protected]). The Tuli & Co website can be accessed at www.tuli.biz.

Endnotes

(1) Writ Petition (Civil) 295/2012, 20 July 2018.

(2) Circular on Implementation of the Directions of the Hon'ble Supreme Court of India in the matter of WP No 295/2012 of Shri S Rajaseekaran vs Union of India and Ors of 28 August 2018.

(3) Circular on Filing of Motor Long Term Third Party Insurance/ Long Term Package Covers/ Bundled Products under the File and Use Guidelines of 19 September 2018.

(4) Circular on Circular on Payment of Commission, remuneration, rewards and distribution fees under Long Term Motor Insurance Policies of 29 August 2018.

(5) Civil Miscellaneous Appeal 1428/2017.

(6) Circular on Enhancement of Capital Sum Insured in Compulsory Personal Accident Cover for Owner-Driver under Motor Insurance Policies of 20 September 2018.

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