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31 March 2020
Third-party liability premium
Standalone own damage cover
Clarification of long-term motor insurance
Transfer of vehicles
Linking of premium and traffic violations
Total loss claims
Motor Vehicle Amendment Act
Motor insurance business in India is regulated by the India Motor Tariff 2002, which was issued by the former Tariff Advisory Committee in 2009. While pricing of the 'own damage' segment was de-tariffed in 2007, the basic product structure, including the policy wordings and other standard forms, continues to be governed by the general regulations and various other provisions of the India Motor Tariff. In addition, the Indian insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), occasionally issues guidelines and circulars which introduce revisions and clarifications with respect to motor insurance business.
The Indian motor insurance framework underwent a variety of key developments in 2019, including:
The IRDAI also proposed revisions to various extant provisions of the India Motor Tariff.
The IRDAI notified the updated premium rates for statutory third-party liability motor insurance for the financial year 2019-20,(1) which has been effective since 16 June 2019. Third-party liability premium rates for electrical vehicles and vintage cars were introduced for the first time, which provided a 15% and 50% discount, respectively, compared with the premium rates made applicable to private cars.
In addition to the bundled long-term third-party liability and one-year own damage cover options for new vehicles permitted by the IRDAI by way of its Circular on Implementation of the Directions of the Honourable Supreme Court of India in the matter of WP No 295/2012 of Shri S Rajaseekaran v Union of India and Ors of 28 August 2018 (Long-Term Circular), the IRDAI has permitted general insurers to offer one-year standalone own damage cover for private cars and two-wheelers.(2) In this regard, insurers must ensure that standalone own damage cover is offered only if third-party liability cover already exists or is taken simultaneously. However, such products are not permitted to be offered on a long-term basis as a standalone own damage policy.
With the introduction of standalone own damage cover, the IRDAI also withdrew the mandatory requirement for insurers to offer bundled (ie, long-term third-party liability with a one-year own damage component) insurance products for private cars and two-wheelers.
In 2014 the IRDAI permitted a standalone long-term third-party liability cover for two-wheelers by way of the Circular on Long-Term Motor Two-Wheeler Insurance Policy of 4 August 2014.(3)
While the long-term motor insurance products introduced in 2018 pursuant to the Long-Term Circular are permitted only with respect to new private cars and new two-wheelers (and not on renewals of existing policies for old vehicles), the IRDAI has now clarified that insurers may continue to renew standalone long-term third-party liability cover for two-wheelers, where issued pursuant to the 2014 circular.(4)
The IRDAI has reiterated that in the event that a motor vehicle is sold or transferred, the guidance provided under General Regulation 17 of the India Motor Tariff (ie, transfers) will apply.(5) Where the new owner chooses to obtain third-party liability cover from another insurer, they can cancel the existing third-party liability cover which was transferred automatically, provided that proof of the new insurance cover is shown to the previous insurer. In addition to long-term motor cover, the foregoing clarification also applies for one-year comprehensive and standalone third-party liability motor insurance policies.
With the notification of the Master Circular on Insurance Advertisements of 16 October 2019, the norms governing insurance ads were expressly made applicable to point-of-sales persons and automobile dealerships operating as motor insurance service providers (MISPs). MISPs must now ensure that all communications made by them to policyholders or the public at large – in relation to motor insurance products or any other ads made with the intention of soliciting insurance business – comply with the norms set out under the master circular, including in relation to the disclosures required.
The IRDAI has constituted a working group based on the recommendation of the High-Powered Committee for Traffic Management in the National Capital Territory of Delhi to establish a system for linking motor insurance premium with traffic violations.(6) The IRDAI has released terms of reference for examining the National Highway Authority's recommendation, including running an immediate pilot project in Delhi to implement a premium escalation formula and developing a system for accessing each vehicle's traffic violation data from law enforcement authorities and transferring the same to the Insurance Information Bureau.
The IRDAI noted that the salvage from motor vehicles subject to total loss claims is commonly sold to scrap dealers.(7) Taking cognisance of reports from various law enforcement authorities that documentation from such destroyed vehicles (ie, those subject to total loss claims) was being forged to provide a new identity to stolen vehicles, the IRDAI advised all general insurers (other than standalone health insurers and specialised insurers) to ensure that the certificate of registration of all vehicles involved in a total loss claim settlement is cancelled per Section 55 of the Motor Vehicles Act.
The Motor Vehicle (Amendment) Act 2019 (Amendment Act) was notified by the central government and came into effect on 1 September 2019. The insurance specific amendments brought in by the Amendment Act to the Motor Vehicles Act are summarised below:
In November 2018 the IRDAI constituted a working group to revisit the product structure of motor insurance in India. The working group's report(13) was released for public comment on 25 November 2019 and made several recommendations to amend the existing framework governing motor insurance, including with regard to:
A summary of the key changes proposed by the working group is provided below.
Calculation of insured sums and depreciation
The working group recommended that the sum insured for brand new cars be calculated based on a combination of:
Following the expiry of the three-year policy term for new vehicles (ie, for motor vehicles aged between four to seven years), the insured sum calculation will be subject to depreciation of between 40% to 60% in accordance with the age of the vehicle. For motor vehicles aged eight years and upwards, the depreciation value and the sum insured will be calculated based on the mutual agreement between the insurer and the insured. The working group also recommended a depreciation rule to be applied at the time of claim settlement, based on the age of the vehicle.
The working group recommended adopting telematics for motor insurance to enable data relating to individual driving habits and patterns to be captured and a risk profile of the driver to be established. It also suggested the creation of a central repository of telematics data with the Insurance Information Bureau. The working group suggested that telematics will help insurers to provide customised solutions to customers in the nature of pay-as-you-drive, pay-how-you-drive and usage-based insurance.
Standardised grid for no claims bonus
The working group recommended a standardised no claims bonus grid for long-term motor insurance policies.
Named driver insurance policy
The working group recommended a named driver policy where the insurance policy provides coverage only for drivers specifically named on the policy and not for any persons driving the vehicle, including the insured.
Insurance for passengers
The working group recommended to have in-built coverage for accidental medical expenses (indemnity basis) for all occupants travelling in motor vehicles, in compliance with their registered seating capacity. The coverage proposed is Rs25,000 per person, irrespective of the category of vehicle.
Compulsory deductibles to be standard deductibles
The working group recommended renaming 'compulsory deductibles' 'standard deductibles'. The working group also recommended that standard deductibles not be waived and suggested that compulsory deductibles for all vehicles should be calculated on the basis of the percentage of the applicable sum insured and subject to a maximum and minimum limit.
In 2019 the IRDAI also took steps to introduce technological innovations in the motor insurance segment – for instance, linking motor insurance premium with traffic violations and implementing telematics to provide customised solutions to customers. The IRDAI's regulatory sandbox committee has also approved a motor insurance product where the calculation of the premium is based on the distance travelled by the motor vehicle.
A plethora of changes were also introduced to the regulatory framework for motor insurance, including the introduction of standalone own damage cover for private vehicles, the application of norms governing insurance ads published by POSPs and MISPs and a proposal to amend the existing framework governing motor insurance as set out under the India Motor Tariff. The IRDAI also brought much needed clarity with respect to applicable third-party liability cover in the event of a transfer of motor vehicles and total loss claims. Statutory amendments to the Motor Vehicles Act now require insurers to provide for the cashless treatment of road accident victims mandatorily, but also permit insurers to deny third-party liability claims where the insurance premium is unpaid or the driver holds no valid driving licence permit.
With the pace of developments in the technology and automobile space, it remains to be seen how these changes will drive innovation in the Indian insurance industry. However, the IRDAI's actions are seen by many as a positive step towards bridging the gap between end consumers' expectations and the insurance solutions presently available to the public.
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 (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Tuli & Co website can be accessed at www.tuli.biz.
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