Executive Summary

In todays modern world everything has become far more advanced

and therefore insurance plays a very vital role in every field and
aspect of life. It is oriented towards the growth of nation but also
common man in general. Every transaction that takes place has an
aspect of banking and insurance involved in it.
All the industries that are existing today are all related to the banking
and insurance activities. Thus you can say that banking and
insurance acts as a focal point for all activities. Why is insurance
necessary? The question contains the answer within itself. After all,
life is fraught with tensions and apprehensions regarding the future
and what it holds for the individual. Despite all the planning and
preparation one might make, no one can accurately guarantee or
predict how or when death might result.
Motor Insurance is one of the largest non-life insurance businesses in
the world. This is because it is statutorily mandated in most parts of
the world. All motor vehicles are required to be registered with the
road transport authorities and insured for third party liability. There
are different classifications of vehicles and risks associated with each
are different and the tariffs are decided by the Tariff Advisory
Committee based on such a classification. The basic premise is that
motor vehicles could either cause injury or be a subject of damage
and injury, and thus require insurance.

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The Motor Vehicle Act of 1939 introduced compulsory insurance to
take care of those who might get injured in an accident. Motor
Insurance is more of a hedging mechanism rather than a real
investment avenue. It is essentially a mechanism that eliminates risks
primarily by transferring the risk from the insured to the insurer. The
chances for a fatality or an injury to occur to the average individual
may not be particularly high but then no one can really afford to
completely disregard his or her future and what it holds.
Therefore, Motor Insurance is mandatory for all new vehicles be it for
commercial or personal use. Insurance companies are coming out
with comprehensive policies for its customers.

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 Introduction

Motor Insurance is one of the largest non-life insurance businesses in

the world. All motor vehicles are required to be registered with the
road transport authorities and insured for third party liability. The
basic premise is that motor vehicles could either cause injury or be a
subject of damage and injury and thus require insurance. The Motor
Vehicle Act of 1939 introduced compulsory insurance to take care of
those who may get injured in an accident.

There has been a phenomenal rise in the motor accidents in the lat 4-
5 years. Much of these are attributable to a sudden spurt in the
number of vehicles. There is a danger at every corner when it comes
to Indian roads. Therefore, every vehicle being driven on roads has to
be compulsorily insured.
Legally, no motor vehicle is allowed to be driven on the road without
valid insurance. Hence, it is obligatory to get the vehicle insured.
Motor insurance policies cover any loss or damage caused to the
vehicle or its accessories due to the natural and man made calamities
like fire, explosion, earthquake, flood, burglary, theft, riot, strike,
malicious act etc. Motor insurance provides compulsory personal
accident for individual owners of the vehicle while driving. One can
also opt for a personal accident cover for passengers and third party
legal liability. The third party legal liability protects against legal
liability arising due to accidental damages. It includes any permanent
injury or death of a person and damage caused to the property.

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It represents a combined coverage of the vehicles including loss or
damage to his property or life and the third party coverage.
We read everyday in the newspapers about accidents, bomb
explosions taking place. 30 out of 100 vehicles meet with accidents
on the road. You step out of your house and at every moment
encounter number of risks that one cannot imagine. What is worrying
for all of us is not the operation of those risks but the operations that
are accidental, unforeseen and external.

There is hardly any industry i.e. manufacturing activity or service

organization that does not come within the scope of General
Insurance. Risk is inherent aspect of human life whether individual or
organization. Without risks there cannot be progress. Occurrence of
uncertainty cannot be predicted. Insurance is one certain way of
dealing with uncertainties because risk arises out of uncertainty and
is a pervasive force in the world.

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 History of Motor Insurance

Motor Insurance had its beginnings in the United Kingdom in the early
part of this century. The first motor car was introduced into England in
1894. The first motor policy was introduced in 1895 to cover third
party liabilities. By 1899, accidental damage to the car was added to
the policy, thus introducing, the comprehensive policy along the lines
of the policy today.
In 1903, the Car and General Insurance Corporation LTD was
established mainly to transact motor insurance, followed by other
companies. After World War 1, there was a considerable increase in
the number of vehicles on the road as also in the number of road
accidents. Many injured persons in road accidents were unable to
recover damages because not all motorists were insured. This led to
the introduction of compulsory third party insurance through the
passing of the Road Traffic Acts 1930 and 1934. The compulsory
insurance provisions of these acts have been consolidated by the
Road Traffic Acts 1960.
In India, the Motor Vehicles Act was passed in 1939 introducing the
law relating to compulsory third party insurance. The practice of
motor insurance in India generally follows that of the U.K. market.
The business is governed by a tariff, whereas in U.K. the tariffs have
been withdrawn. The Motor Vehicles Act 1988 has replaced the
earlier 1939 Act, and it became effective from 1 st July 1989.

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 Meaning

Motor Insurance is insurance where consumers can purchase for

cars, trucks and other vehicles. Its primary use is to provide
protection against losses incurred as a result of traffic and car
accidents. An insurance company may declare a vehicle totally
destroyed (totalled or write-off) if it appears replacement would be
cheaper than repair. It is a comprehensive policy that not only covers
you against third party but also against accidents, damage, injury and
much more.

Motor Insurance is a legal requirement if you want to drive your car

on public roads. However, this doesnt mean there arent still ways to
save money, even if you dont belong to one of the traditionally safe
group of drivers. The type of insurance you take out, along with the
type of driver you are, combining to provide the overall likelihood that
you will be able to get a cheap quote.
Compulsory Motor Insurance results in lowering the disposable
income or it results in a shift of income from lower group to the higher
group. If it is not made compulsory, there is a strong possibility that
some may not buy these voluntarily. This is because most of them
think that the cost of accidents or losses will fall on others or they
underestimate the risk of loss. Also, Compulsory insurance would
encourage people to drive safely which may reduce the cost of risk.

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 Need for Motor Insurance

In Indian conditions the vehicles are subject to many hazards like

potholes, puddles, traffic management system, jaywalkers, increasing
number of accidents etc. which accentuate the need for automobile
insurance. Some of these hazards are discussed below:-

Footpaths: As footpaths are occupied by hawkers, pedestrians

have a tough time dodging between vehicles to reach the other
end of the road. Large potholes during monsoons can worsen
the situation causing damage to the vehicle.
Drunken Driving: It is another major reason for increase in
accidents, be it a car, two-wheeler or even a truck.
Reckless Driving: Majority of the youngsters drive recklessly
caring little for the law, causing serious accidents resulting in
loss of life or limb.
Fire: There is also a danger of fire or theft of vehicle Therefore,
motor insurance under such unsafe conditions is a must not
only to cover risks towards the owner and the vehicle but also
to cover the financial liability that may arise from an accident in
which the other party is injured or the cost of repairs that you
may have to pay to other party in case of an accident.
Theft: Cases of stolen cars on the rise. Experts in stealing cars
are well aware of the loopholes that can be exploited and
accordingly have been successful in manipulating with the
chases no. of vehicles in order that they are not traced.

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 Principles of Motor Insurance

1. Principle of Utmost good faith: Contracts of motor insurance

are governed by the doctrine of utmost good faith. It is the
name of a legal doctrine which governs insurance contracts.
Under utmost good faith contracts if there is a violation it is
categorized as a material misrepresentation, a breach of a
warranty, or concealment. Some examples of material facts in
motor insurance are the type of vehicle, the geographical area
of use, the physical condition of the driver, the driving history of
the driver etc.
2. Principle of Contract of Indemnity: The principle of
indemnification is that the insured should not profit from the
policy. This does not preclude that the insured will suffer some
loss. In fact, many policies include a deductible which
guarantees that the insured will pay part of each loss himself. In
the event of total loss of the vehicle, insurers pay the market
value of the vehicle at the time of loss or the sum insured
whichever is less. If vehicle is damaged, the cost of repairs is
paid, but if old parts are replaced by new, a suitable
depreciation is charged on the cost of new parts.
3. Principle of Insurable Interest: Insurable Interest is one
wherein loss would be suffered from an adverse occurrence to
the person insured. In motor insurance, the vehicle is the
property which is exposed to loss or damage. The insured also
has a legal liability towards third parties; he may suffer financial
loss if he incurs that liability caused by negligent use of the

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 vehicle. Therefore, the insured has insurable interest which
entitles him to insure the vehicle against damage and liability
risk. Motor policies are extended to indemnify persons other
than the insured in respect of third party liability. Although owner
insured has, no insurable interest in any such liability, he is
deemed as having acted as an agent in arranging the indemnity
on behalf of other persons who may drive the vehicle and incur
liability. Otherwise, the injured third parties will have no
recourse to recover damages.
4. Principle of subrogation: Subrogation is the transfer of the
rights from the insured to the insurer when the loss or damage
to the vehicle is caused by the negligence of another person.
Insurers exercise the right to cover the loss from the person
responsible. Subrogation operates only after the claim is paid.
5. Principle of contribution: It arises when there is double
insurance, that is, when the same vehicle is insured under two
policies. The contribution condition is specially worded in
private car policies because the owner is also covered for the
third party liability while driving cars not belonging to him.
6. Proximate Cause: In this, the loss or damage to the vehicle is
indemnified only if it is proximately caused by one of the
insured perils. The doctrine also applies to third party claims.
The third party injury or property damage must be proximately
caused by the negligence of the insured for which he is held
legally liable to pay damages.

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 Classification of Motor Vehicles
For the purpose of insurance Motor Vehicles are classified into the
following categories:
1. Private Cars:
Vehicles used solely for social, domestic and pleasure
purposes.
Cars of private type including station wagons, used for
domestic, business and professional purposes of the
insured or used by the insureds employees for such
purposes.
Three wheeled cars (including cabin scooters used for
private purposes)
2. Motor Cycles and Motor Scooters:
Mechanically propelled two wheelers with or without side
car.
Mechanically propelled three wheelers with engine
capacity.
3. Commercial Vehicles:
Goods carrying vehicles.
Passengers carrying Vehicles e.g. motorized rickshaws,
taxis, buses.
4. Miscellaneous and special types of Vehicles:
Agricultural tractors and fire tenders and salvage corps.
Hearses, ambulances, cranes, excavators
Cinema film recording and publicity vans

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 Garbage dumping trucks, road rollers etc.

Types of Motor Insurance Available

1. Two Wheeler Insurance: Two wheeler insurance provides a

kind of personal accidental cover for owners, while driving
the vehicle. The policy generally provides protection from
any loss or damage to the vehicle arising out of natural
calamity like fire, injury, burglary etc. The amount insured will
depend on the current showroom price multiplied by the
depreciation rate fixed by the Tariff Advisory Committee at
the time of commencement of policy period. Fast and easy
claim process by most insurance companies will ensure
existing customer loyalty and widen the customer base.
2. Car Insurance: Car insurance is the fastest growing
segment in the auto insurance category. This is because
insuring car is mandatory for everyone buying a new car. Car
insurance includes loss or damage by accident, third party
insurance, insurance against burglary etc. The amount of
premium will depend on the make and value of the car, state
where the car is registered, year of manufacture etc.
3. Commercial Vehicle Insurance: This covers all vehicles not
used for personal purpose. Trucks and heavy motor vehicles
are covered under this insurance. This insurance protects
against damage caused due to accident, third party injury
etc. The premium amount depends on a number of factors

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 like showroom price of the vehicle at the commencement of
the insurance period.

Motor Vehicle Act

In India the Motor Vehicles Act was first introduced in 1939 and later it
became effective from 1st July 1989. It introduced the law relating to
compulsory insurance of any motor vehicle that plies in public places.
Motor Vehicles Act states that every motor vehicle plying on the road
has to be insured, with at least Liability only policy. There are two
types of policy one covering the act of liability, while other covers
insurers all liability and damage caused to ones vehicle. Since a
single policy cannot meet all the insurance objectives, one should
have a portfolio of policies covering all the needs.

Some of the provisions of the Act provide the following matters:

Rationalisation of certain definitions with addition of certain new
definitions of new types of vehicles.
Stricter procedures for grant of driving licences and period of
their validity
Laying down of standards for the components and parts of
motor vehicles.
Provisions for issuing fitness certificates of vehicles also by the
authorized testing stations.
Enabling provision for updating the system of registration
marks.

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 Maintenance of state registers for driving licenses and vehicle
registration and constitution of Road Safety Councils.
Standards for anti-pollution control devices.

Seeking to provide for more deterrent punishment in cases of

certain offences.
Liberalized schemes for grant of All-India Tourist permits as also
national permits for goods carriages.

The liabilities that require to be covered under this Act are:

Any liability arising in respect of death or bodily injury to any
person including the owner of the vehicle or his authorized
person in the carriage.
Any liability incurred in respect of damage to any property of a
third party.
Any liability incurred in respect of the death or bodily injury of
any passenger of a public service vehicle.
Any liability arising under Workmens Compensation Act, in
respect of injury or death of:
A paid driver of the vehicle
Conductor or ticket examiner
Workers carries in a goods vehicle.
Any liability for bodily injury or death of passengers who are
carried for reward or hire by reason of a contract of
employment.

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 The policy should carry a no fault liability limited to a sum of Rs
50,000 in case of death, Rs 25,000 in case of permanent
disability and Rs 6,000 in case of damage to property.

Laws and Regulations

The classical scene on Indian roads is that of arrogant drivers
bullying over safe drivers. Trucks, buses, cars, two wheelers and
three wheelers all wedging in between other vehicles, try to race
ahead, at traffic signals and in between signals. With their hands on
the steering wheel, most drivers feel they own the roads. For these
drivers traffic rules are silly and kill the joy of driving a vehicle.

More than 35 million registered vehicles traffic a network of around 3

million kms of roads in India. The Indian roads see more than 3 lakh
road accidents that kill more than 65000 people and injure another 3
lakh. The most appalling fact is that, most accidents happen due to
sheer ignorance amongst drivers and vehicle owners of basic rules
for Indian roads. Therefore, better knowledge of rules and regulations
could help everyone on the roads.
The RTO office enforces the law on Indian roads, and the law that
governs the Indian roads are the following:

The Motor Vehicles Act (MVA) 1914/ 1939 AND 1988- The law for
operation for all Motor Vehicles in India.
The Central Motor Vehicles Rules (CMVR) 1994- Rules that
stipulate various procedures with reference to the MVA 1988.

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The State Motor Vehicles Rules- Rules framed by various state
governments in accordance with the MVA and CMVR to suit local
conditions of the State.

Rules and Regulations in relation to Motor Insurance:

Driving Licence (Section 14 Motor Vehicles Act):
An appropriate driving licence is required if you want to drive a motor
vehicle anywhere in India. A drivers licence issued by the competent
authority of any state/union territory is valid throughout the Indian
Union. International Driving Permit (IDP) can be issued by any RTO
or motoring associations, like The Western India Automobile
Association, authorised by the Government. The period of validity is
one year. You must carry your driving licence on your person at all
times; a photocopy of the driving licence is not acceptable.
Registration, where to be made (Section 40 of Motor Vehicles
Act):
Subject to the provisions of section 42, section 43 and section 60,
every owner of a motor vehicle shall cause the vehicle to be
registered by a registering authority in whose jurisdiction he has the
residence or place of business where the vehicle is normally kept.
Registration, how to be made (Section 41 of Motor Vehicles Act)
An application by or on behalf of the owner of a motor vehicle
for registration shall be in such form and shall be accompanied
by such documents, particulars and information and shall be
made within such period as may be prescribed by the Central
Government.

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 The registering authoring shall issue to the owner of a motor
vehicle registered by it a certificate of registration in such form
and containing such particulars and information an in such
manner as may be prescribed by the Central Government.

In addition to the other particulars required to be included in the

certificate of registration, it shall also specify the type of the
motor vehicle, having regard to the design construction and use
of it, by notification in the Official Gazette.
The registering authority shall enter the particulars of the
certificate in a register to be maintained in such form as may be
prescribed by the Central Government.
The registering authority shall assign to the vehicle, for display
thereon, a distinguishing mark referred to as the registration
mark followed by such letters and figures as allotted to the state
and displayed and shown on the motor vehicle in such form as
may be prescribed by the Central Government.
A certificate of registration in respect of a motor vehicle, other
than a transport vehicle, shall, subject to the provisions
contained in this Act, be valid only for a period of fifteen years
from the date of issue of such certificate and shall be
renewable.

Alteration in Motor Vehicle (Section 52 Motor Vehicles Act):

No vehicle can be altered to an extent that the particulars containing
in the registration certificate are no longer accurate. Before doing any

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alterations, it is necessary to have permission of the concerned RTO.
After carrying out the alteration, the owner must forward the
registration certificate to the RTO within 14 days, for making
necessary corrections.

Cancellation of registration (Section 55 of Motor Vehicles Act)

If a motor vehicle has been destroyed or has been rendered
permanently incapable of use, the owner shall, within fourteen
days or as soon as may be, report the fact to the registering
authority within those jurisdiction he has the residence or place
of business where the vehicle.
The registering authority shall, cancel the registration and the
certificate of registration, or, if it is not, shall forward the report
and the certificate of registration to the original registering
authority and that authority shall cancel the registration.
A registering authority cancelling the registration of a motor
vehicle under section 54 or under this section shall
communicate such fact in writing to the owner of the vehicle,
and the owner of the vehicle shall forthwith surrender to that
authority the certificate of registration of the vehicle.

The colour scheme for Non Transport vehicles (Section 118

Motor Vehicles Act):
Permanent Registration- White on Black plate
Temporary Number- Red on Yellow Plate

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 Fancy lettering, raised or shining metal numbers are not
permitted. The plate should not have any line, or colour, or any
other kind of marking on it.

Car Registration Mark (Rules 50, 51 Central Motor Vehicles):

The registration number displayed must confirm to following
specifications:
Letters: 4.5 cm high/1 cm thick
Numerals: 6 cm/ 1 cm thick
Space between letters/ numerals should not be less than 1 cm.

Lamps and additional lights (Rules 105-108,111 Central Motor

Vehicles Rules):
Spotlights, search lights, fancy lights, mercury lamps are
expressly forbidden.
Dome lights are not permitted unless specially authorised.
A reversing white light is permitted provided the light is diffused
and not too bright.

Rear View Mirror (Rule 125 Central Motor Vehicles Rules):

Every motor vehicle, except motor cycles, must be fitted with a rear
view mirror in such a way that the driver has a clear vision of the
traffic behind.

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Horns (Rule 119 Central Motor Vehicles Rules):
No vehicle is allowed to be fitted with any multitone horn. Horns
producing musical notes, unduly harsh, loud, shrill or alarming noises
fall in this category.

Tinted glasses (Rule 100 Central Motor Vehicles Rules):

Tinted glasses or sun control films should not be so dark as to
obscure clear vision.
Any material that reflects light is also not permitted. Use of
curtains that obscure clear vision is prohibited.

TV/Video/Music (Rule 162 Central Motor Vehicles Rules):

No TV/Video display should be placed in a vehicle in a manner that it
may distract the driver. The music played in the vehicle must be kept
at low levels of sound so as not to distract other drivers on the road.

Duty of driver in case of accident and injury to a person (Section

134 Motor Vehicles Act):
When any person is injured or any property of a third party is
damaged as a result of an accident in which a motor vehicle is
involved, the driver of the vehicle or other person in charge of
the vehicle shall-

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 Unless it is not practicable to do so on account of mob fury or
any other reason beyond his control, take all reasonable steps
to secure medical attention for the injured person, by conveying
him to the nearest medical practitioner or hospital immediately
unless the injured person or his guardian, in case he is a minor,
desires otherwise.
Give on demand by a police officer any information required by
him, or, if no police is present, report the circumstances of the
occurrence, if any, for not taking reasonable steps to secure
medical attention as required, at the nearest police station as
soon as possible, and in any case within twenty four hours of
the occurrence.
Give the following information in writing to the insurer who has
issued the certificate of insurance, about the occurrence of the
incident namely:
Insurance Policy number and its period of validity.
Date, Time and Place of accident.
Particulars of the persons injured or killed in the accident.
Name of the driver and particulars of his driving license.

Necessity for insurance against third party risks: (Section 146

Motor Vehicles Act):
No person shall use, except as a passenger or cause or allow any
other person to use, a motor vehicle in a public place unless there is
in force a policy of insurance complying with the requirements of the
provisions of the Act. The legal requirement is of third party

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insurance only. It is sensible to have a comprehensive policy that
covers- third party risk, damage/loss due to accident, fire or theft and
also covers risks against floods, earthquake, riots and strikes.
Also, in the case of a motor vehicle carrying or meant to carry
dangerous or hazardous goods there shall be policy of insurance
under the Public Liability Act 1991.

Section 196: Driving under vehicle:

Whoever drives a motor vehicle or causes or allows a motor vehicle
to be driven in contravention of the provisions of Section 146 shall be
punishable with imprisonment which may extend to three months, or
with fine which may extend to Rs 1000 or both.

Transfer of certificate of insurance (Section 157 of Motor

Vehicles Act 1988):
Where a person in whose favour the certificate of insurance has been
issued, transfers to another person the ownership of the motor
vehicle, in respect of which such insurance was taken together with
the policy of insurance relating thereto, the certificate of insurance
and the policy described in the certificate shall be deemed to have
been transferred in favour of the person to whom the motor vehicle is
transferred with effect from the date of its transfer. The transferee
shall apply within fourteen days from the date of transfer in the

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prescribed form to the insurer for making necessary changes in the
certificate and the policy of insurance in regard to the transfer of
insurance.

Hit and Run Motor Accidents:

Section 161 to 163 Motor Vehicles Act, 1988 describes the procedure
of the insurance payments in the case of Hit and Run Motor
Accidents. They are those accidents in which a member of the public
is hit by a motor vehicle not identifiable or traceable by reasonable
efforts of the claimants or the insurers. It defines the terms such as
grievously hurt, death by hit and run motor accident.

Claims Tribunals (Section 165 of Motor Vehicles Act 1988):

A state Government may, by notification in the official Gazette,
constitute one or more Motor Accidents claims Tribunals for such
area as may be specified in the notification for the purpose of
adjudicating upon claims for compensation in respect of accidents
involving the death of, or bodily injury to, persons arising out of the
use of motor vehicles or damages to any property of a third party so
arising or both. A claims tribunal shall consist of such number of
members as the state government may think fit to appoint and where
it consists of two or more members, one of them shall be appointed
as the chairman thereof.
A person shall not be qualified for appointment as a member of a
Claims Tribunal unless he-
Is, or has been, a Judge of a High Court, or
Is, or has been a District Judge, or

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Is qualified for appointment as a High Court Judge

Application for compensation (Section 166 of Motor Vehicles

Act):
An application for compensation arising out of an accident of the
nature specified in sub-section (1) of section 165 may be made-
By the person who has sustained the injury
By the owner of the property
Where death has resulted from the accident, by all or any of the
legal representatives of the deceased.

Every application under sub-section (1) shall be made, at the option

of the claimant, either to the Claims Tribunal having jurisdiction over
the area in which the accident occurred, or to the Claims Tribunal
within the local limits of whose jurisdiction the claimant resides or
carries on business or within the local limits of whose jurisdiction the
defendant resides, and shall be in such form and contain such
particulars as may be prescribed: Provided that where no claim for
compensation under section 140 is made in such application, the
application shall contain a separate statement to that effect
immediately before the signature of the applicant.

Award of the Claims Tribunal (Section 168 of Motor Vehicles Act)

On receipt of an application for compensation made under section
166, the Claims Tribunal shall arrange to deliver copies of the award

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to the parties concerned expeditiously and in any case within a period
of fifteen days from the date of the award. When an award is made
under this section, the person who is required to pay any amount in
terms of such award shall, within thirty days of the date of announcing
the award by the Claims Tribunal, deposit the entire amount awarded
in such manner as the Claims Tribunal may direct.

Procedure and powers of Claims Tribunals (Section 169 of Motor

Vehicles Act):
The Claims tribunal shall have all the powers of a Civil Court for the
purpose of taking evidence on oath and of enforcing the attendance
of witnesses and of compelling the discovery and production of
documents and material objects and for such other purposes as may
be prescribed. Subject to any rules that may be made in this behalf,
the Claims Tribunal may for the purpose of adjudicating upon any
claim for compensation, choose one or more persons possessing
special knowledge of any matter relevant to the inquiry to assist it in
holding the inquiry.

Appeals (Section 173 of Motor Vehicles Act):

Subject to the provisions of sub-section (2) any person aggrieved by
an award of a Claims Tribunal may, within ninety days from the date

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of the award prefer an appeal to the High Court: Provided that no
appeal by the person who is required to pay any amount in terms of
such award shall be entertained by the High Court unless he has
deposited with it twenty five thousand rupees or fifty percent, of the
amount so awarded, whichever is less, in the manner directed by the
High Court: Provided further that the High Court may entertain the
appeal after the expiry of the said period of ninety days, if it is
satisfied that the appellant was prevented by sufficient cause from
preferring the appeal in time. No appeal shall lie against any award of
a Claims Tribunal if the amount in dispute in the appeal is less than
ten thousand rupees.

Using vehicle without registration (Section 192 Motor Vehicles

Act):
Whoever drives a motor vehicle or causes or allows a motor vehicle
to be used in contravention of the provisions of section 39 shall be
punishable for the first offence with a fine which may extend to five
thousand rupees but shall not be less than two thousand rupees for a
second or subsequent offence with imprisonment which may extend
to one year or with fine which may extend to ten thousand rupees but
shall not be less than five thousand rupees or with both. Nothing in
this section shall apply to the use of a motor vehicle in an emergency
for the conveyance o persons suffering from sickness or injuries.

Using vehicle without permit (Section 192A of Motor Vehicles

Act):

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Whoever drives a motor vehicle or causes or allows a motor vehicle
to be used in contravention of the provisions of sub-section (1) of
section 66 or in contravention of any condition of a permit relating to
the route on which the vehicle may be used, shall be punishable for
the first offence with a fine which may extend to five thousand rupees
but shall not be less than two thousand rupees and for any
subsequent offence with imprisonment which may extend to one year
but shall not be less than three months or with fine which may extend
to ten thousand rupees but shall not be less than five thousand
rupees or with both.

Types of Motor Insurance Policies

Legally, no motor vehicle is allowed to be driven on the road without
valid insurance. The All India Motor Tariff governs motor insurance
business in India. According to the tariff, all classes of vehicle use the
following types of motor insurance policies as issued under Car and
Two-Wheeler insurance.

Car Insurance:
Suitability: One should possess a valid Liability Policy to use a
motor vehicle in a public place, as it is made compulsory by the
provisions of Motor Vehicles Act 1988. In case a vehicle is purchased
under Hire Purchase agreement, the financiers insist upon a Package
Policy to take care of their interest as collateral security.

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Salient features: Insurance companies issue Liability for Act Risks
and Package policy for Comprehensive Risks under the Motor
Vehicles Insurance.

Liability Policy: Liability policy covers risks required to be covered

under the Motor Vehicles Act. It is mandatory that every car owner be
covered against Act Risks under section 146 of Motor Vehicles Act
1988. The scope of cover is to pay compensation for death of or
bodily injuries to third parties and damage to the property of third
parties. While the insured is treated as the first party and the
Insurance Company second party, all others would be third parties.

This policy provides personal accident cover of Rs 2, 00,000 to owner

driver. While the compensation for the personal injuries to third
parties is unlimited, property damage is limited to Rs 7, 50,000.

Package policy: This policy covers all the risks of liability policy as
well as the loss of or damage to insureds vehicle, also the perils
covered are:
Damage to vehicle by accidental external means, fire, lightning,
explosion, self ignition, burglary
Riot and strike, malicious acts and terrorist acts
Earthquake
Flood, inundation, cyclone etc

27
 Landslide/ rockslide
Package policy can be restricted to loss or damage due to fire or theft
or both. In case of liability policy + fire, the premium is only 25% of
own damage premium + liability premium. In case of liability only
policy + theft, the premium is only 30% of own damage premium +
liability premium and in case of liability only policy + fire and theft, the
premium is 50% of own damage premium + liability premium.

No claim discount: For every claim free year, the insured is rewarded
with discounts in premium up to an extent of 55%. In case of a claim
in any year, bonus earned till that year is wiped out.

Two Wheeler Insurance :

Suitability: All two wheeler owners should avail the Policy A or the
Act Policy as it is made compulsory by the provisions of Motor
Vehicles Act 1988. In case a vehicle is purchased under Hire
Purchase agreement, the financiers insist upon a Comprehensive
Policy to take care of their collateral security.

Salient features: Insurance companies issue policy A or Act Policy

and Policy B or the Comprehensive Policy under the Motor Vehicles
Insurance.

Policy A (Act Policy): Policy A covers risks required to be covered

under the Motor Vehicles Act. It is mandatory that every two wheeler

28
owner be covered against Act Risks under section 146 of Motor
Vehicles Act 1988. The scope of cover is to pay compensation for
death of or bodily injuries to third parties and damage to the property
of third parties. While the insured is treated as the first party and the
insurance company as second party, all others would be third parties.
As per requirements of the Motor Vehicles Act, while compensation
for personal injuries to third parties is unlimited, property damage is
limited to Rs 6,000 only. This limit can be enhanced on payment of
additional premium.

Policy B (Comprehensive Policy): For private cars and motor

cycles, there are two sections in the Comprehensive Policy.
Section 1 concerns loss or damage to the vehicle and covers the
risks, This policy covers all the risks of Policy A as well as the loss of
or damage to insureds vehicle also, the perils covered are:
Damage to vehicle by fire, lightning, explosion
Riot & strike, malicious acts and terrorist acts
Earthquake
Flood, inundation, cyclone etc
Landslide/ rockslide while in transit by rail, road, air

Policy B can be restricted to loss or damage due to fire or theft or

both fire & theft in combination with policy A or without. In case of Act

29
Policy+ fire or theft, the premium is only 25% of own damage
premium+ Act premium. In case of Act + Fire & theft, the premium is
40% of own damage premium + Act premium. These extended
covers can be obtained without inclusion of Act risks, provided the
vehicle is not put to use.

The geographical limit for use of the vehicle is India, but the limits can
be extended to Nepal & Bhutan without extra premium and to
Bangladesh by charging an extra premium of Rs 50 for
comprehensive policy and Rs 10 for Act policies. Policies can be
issued for periods less than one year. Long term policies can be
issued for Act only risks.

Motor Tariffs
The Tariff Advisory Committee (T.A.C.) has aid down detailed rules,
regulations, rates, terms and conditions for transactions of motor
insurance in Indian accordance with the provisions of part 2 (B) of the
Insurance Act,1938. The Tariff supersedes the provisions of Indian
Motor Tariff in existence up to 30 th June 2002. There is no motor
insurance in India which is non tariff. The Tariffs are administered by
the miscellaneous sub-committee of the four Regional Committees of
the T.A.C. in Bombay, Calcutta, Madras and Delhi.

Indian Motor Tariff: The Indian Motor Tariff has laid out certain general
regulations that are to be followed by the insurer and the insured to
constitute a valid contract. The regulations provide that the motor
insurance in India cannot be transacted outside the purview of the

30
Indian Motor Tariff unless specifically authorized by the Tariff Advisory
Committee. Some of the important General Regulations under Indian
Motor Tariff are as follows:

GR-9: Depreciation on parts for partial loss claims:

The following rates of depreciation shall apply for replacement of
parts for partial loss claims in respect of all categories of vehicles.
Rate of depreciation for all rubber nylon/plastic parts tyres and
tubes, batteries is 50%
Rate of depreciation for all parts made of glass is nil
Rate of depreciation for all other parts like wooden parts
depends upon the age of car.

GR-12: Premium rates for short period cover:

Policies issued or renewed for periods shorter than 12 months will
attract short period rates which must also be applied in calculating the
premium when policies are cancelled.

GR-17: Transfer of rights to the legal heir in case of death of

insured owner of vehicle:
The existing Motor Tariff do not provide for automatic transfer of the
rights to the legal heir in case of death of insured owner of vehicle. In
order to facilitate the smooth transfer of the rights to the legal heir, it
was decided at the Tariff Advisory Committee meeting held to
incorporate the following provisions as a part of policy conditions.

31
In the event of death of the sole insured, this policy will not
immediately lapse but will remain valid for a period of three months
from the date of the death of the insured or until the expiry of this
policy (whichever is earlier). During the said period legal heirs of the
insured to whom the custody and use of the motor vehicle passes
may apply to have this policy transferred to his/her/their names or
obtain a new insurance policy for the motor vehicle.

Where such legal heirs wish to apply for a transfer of this policy or
obtain a new policy for the Motor Vehicle he/she/they should make an
application as per his/her/their requirements within the aforesaid
period to the company.

All such applications should be accompanied by:

Death certificate in relation to the insured
Proof of title to the motor vehicle
Copy of this policy

GR-20: Vehicles subject to Lease Agreement:

It is not permissible to issue policies in the joint name of Lessee and
Lessor. Policies must be issued in the name of Lessee and Lessors
interest protected by the use of specified endorsement.

GR-21: Vehicles subject to Hypothecation Agreement:

32
It is not permissible to issue policies in the joint name of register
owner of the vehicle. Policies must be issued in the name of register
owner of the vehicle protected by the use of specified endorsement.

GR-22: Cover Note:

Cover Note insuring motor vehicles are to be issued only in form 52 in
terms of rule 142 sub rule (1) of the Central Motor Vehicles Rules
1989 and as per section 6 of the India Motor Tariff. A cover note shall
be valid for a period of 60 days from the date of its issue and the
insurer shall issue a policy of the insurance before the date of expiry
of the cover note.

GR-23: Certificate of Insurance:

It is issued by the insurers in relation to every vehicle is the only
evidence acceptable to the police authorities to show that valid
insurance exists. This document has to be produced when demanded
by an authorized police officer. It cannot be backdated. Hence, if a
policy is not renewed on or before the expiry date, the certificate of
insurance in respect of new insurance will be effective only from the
date of new insurance.

GR-24: Cancellation of Insurance and Double Insurance:

33
Cancellation of Insurance: A policy can be cancelled only after
ensuring that the vehicle is insured elsewhere and the original
certificate of insurance is surrendered. If no claim has bee reported or
made, a pro-rata refund subject to minimum premium being retained,
can be made if the vehicle has been insured continuously for at least
12 months preceding the date of cancellation under a policy in the
name of the policyholder.
If the policy has been in force for less than a year, the refund should
be on short period basis subject to minimum premium being retained.
If a claim is made or reported, no refund of premium should be
allowed. It is important that the insurer should inform the R.T.O by
registered post about the cancellation of insurance. In every case
when policies are cancelled at insureds request to take advantage of
pending rate changes, refund of premium must be calculated on short
period basis.

Double Insurance: In case of Double Insurance, on cancellation of

one of the policies by either of the parties, refund should be granted
on pro-rata basis and not on short basis for period both the policies
are in force concurrently.

GR-25: Cancellation and issuance of fresh certificate of

insurance:
Whether any alteration is made in the policy affecting the information
shown on the certificate of insurance, then it must be returned to the
insurance company by the insured for cancellation and a new

34
certificate must be issued. When a policy is cancelled by the insurer,
the insurer should, within seven days, notify such cancellation to the
registering authority concerned.

GR-34: Registration, use and insurance:

It is not permissible to insure any vehicle used for a purpose other
than that permitted by RTA concerned and also to insure any vehicle
in the name of an insured not conforming to the name recorded as
owner of the vehicle in the vehicle registration document excepting:
In case of temporary substitution
In respect of Motor Trade Risk

Documents

Proposal Forms: In Motor Insurance contract the proposal form is

used as a rule, it constitutes the means of communicating the offer to
the insurers or for making proposal for motor insurance. It is so
desired as to elicit all information necessary for a proper evaluation of
the risk and for rating. The questions commonly asked are:

35
 Particulars about the proposed: Name, Address and
Occupation
Details of the vehicle to be insured: Registration letters and
numbers make of the vehicle, date of purchase and price paid
etc.
Details of other vehicles owned by the proposer and details of
the accidents during the past 3 to 5 years
Details of insurance history

Certificate of Insurance: This is a document evidencing that a motor

vehicle is insured against third party liability as required under the
Act. Certain features which appear in the certificate are:

Certificate number
Registration mark and number or description of the vehicle
insured
Effective date for commencement of insurance
Date of expiry of insurance
Limitations of use
Persons or classes of persons entitled to drive

Cover Note: It is usually issued when the policy and certificate of

insurance cannot be immediately issued for any reason. It has to be
issued in a prescribed form and is valid for a period of 15 days.

36
Policy Forms: Policy forms like proposal forms vary within wide limits
as between different classes of insurance, but they have certain
features in common. The policy is not the contract itself, but the
evidence of the contract. As soon as the policy is issued, the cover
note is cancelled.

Endorsements: It is a document which incorporates change in the

terms of the policy. It may be issued at the time of issuing the policy
to provide additional benefits and covers or to impose restrictions.

Renewal Notice: It is the practice of companies to issue renewal

notice to the insured usually one month in advance of the date of
expiry of the policy.

Renewal Receipt: This is a simpler document than the policy. It is

worded to the effect that in consideration of receipt of renewal
premium, the policy is renewed for a further period of 12 months

Underwriting
Motor Insurance business in India id generally considered to be an
unprofitable class of business. It is therefore essential to adopt a
sound underwriting policy which involves not only careful selection of
risks and imposition of appropriate terms and conditions. The main
factors taken into consideration for underwriting are as follows:

37
The type of Vehicle: The underwriting approach differs according to
the type of vehicle. The heavier vehicles are more exposed to
accidents since the resultant damages they incur are more. Similarly,
vehicles with higher carrying capacity expose more passengers to
risk. Therefore heavier vehicles attract higher premium rate. In private
cars, taxis and motor cycles the more the cubic capacity, the higher is
the premium rate.

The value of the vehicle: The premium rate is applied on the value
of the vehicle to arrive at the premium payable. It is the owner who
has to select a correct value of the vehicle and declare the same for
insurance. This value is known as the Insureds Estimated Value
(IEV). In motor insurance, the IEV is the limit of liability per accident
and not for the entire period of insurance.
Normally, this value is arrived at by considering the age of the vehicle
and its present purchase price. It is not worthwhile to insure your
vehicle at a higher value since that will increase the premium payable
but, in case of total loss, only the market value would be payable.

It is very important to select a correct IEV for insurance. There is a

tendency of motor vehicle owners to declare a lower value for
insurance to reduce the premium expenditure. Although, insurance
companies check the IEV for its sufficiency before accepting the
insurance, this is not a correct practice as the insured is exposed to a
greater loss in case the vehicle is totally lost or damaged.

38
The Use of the Vehicle: Risk exposure varies in relation to the use
of the vehicle. For e.g. taxis attract a higher premium rate whereas
goods carrying vehicles, which are used as private carriers and
transport, attract a lower premium rate.

The Geographical area of operation: The area of operation of a

vehicle has a direct bearing on the premium rate. This is so because,
certain areas are more congested with high densities of population
and road traffic than others and poses higher exposure to accidents.
For this purpose, the tariff differentiates two zones in India, i.e. Zone
A and Zone B, for private cars and taxis.
Zone A represents the Madras region and Bombay region (excluding
Bombay city) and Zone B represents the Calcutta region, Delhi region
and Bombay city. In Zone B, the densities of population and road
traffic are more and hence attract a higher premium rate. Such
differential rating does not apply to commercial vehicles such as
trucks and buses, as these vehicles normally travel throughout India
for their operation.

Driver of the vehicle: The personal hazard of the driver is a crucial

factor in the underwriting system. The hazard arising from the driver
can be assessed from the point of view of his age, physical health,
occupation and driving experience. Age has a material bearing on the
risk. The young driver presents an unfavourable hazard because
speed has special attraction for youth. Some insurance companies
may also consider the sex and marital status of the driver.

39
There is evidence that a female driver may present a better risk than
a male and that a married person with possibly a family is a better
risk than a single person. The driving experience may indicate
accident proneness. It is found that numerous claims occur with new
drivers because of their limited driving experience. Another great
menace on the road is the experienced driver who is reckless and will
take risks which the new motorist would never do.

The claims experience: Unfavourable claims experience is

obviously a bad risk. The tariff has adopted a system called the
Bonus/Malus Clause, to give discounts for good claims experience
and a loading for bad experience.
The system of Bonus/Malus recognizes the above factor indirectly
since bonus is a reward which allows discounts for claim free period,
while Malus is a loading in the premium for adverse claims. The
minimum bonus is 20% and maximum is 65% whereas minimum
Malus is 10% and maximum is 50%.

Claims
Motor Insurance business in India is generally considered to be an
unprofitable class of business. In recent years, the claims under
motor insurance have shown signs of deterioration. With the increase
in the number of vehicles and traffic density, higher costs of labour

40
and spare parts and escalating awards for third party claims, control
of claims cost is imperative.

The Insurance Companies in India are therefore required to pay the

compensation amount to accident victim or the family members within
90 days. If the insurance company fails to do so, then the Motor
Accident Claims Tribunals (MACT) must impose a penalty of Rs
5,000 on such companies for the delay. If after 90 days the insurance
company fails to pay the amount it shall be the duty of the banker to
deposit the cheque drawn in the name of claimant with the MACT in
one week of 90 days expiry period.

Most of the people perceive that procedure involved in claiming

insurance is not too complicated and cumbersome. Smaller claims
are processed within a period of two weeks but larger claims involve
more procedures at the insurance companys office and thus take
longer time.

Settlement of claims under Motor Insurance

For settlement of insurance claim under motor vehicle insurance the

following claims usually occur in the following ways:

Claims for Own Damage:

41
On receipt of notice of loss, the policy records are checked to see
that the policy is in force and that it covers the vehicle involved. The
loss is entered in the claim register and a claim form is issued to the
insured for completion and return. The insured is also requested to
submit a detailed estimate of repair charges.

Assessment of Survey Report: Independent Automobile

Surveyors are assigned the task of assessing the cause and

extent of loss. They inspect the damaged vehicle. And submit
their report along with the copy of the policy, claim form and
estimate cost of repairs.
Claims Documents: The other documents required for
processing the claim are:
Driving Licence
Registration of Certificate book
Fitness Certificate
Police Report
Financial Bill
Satisfaction Note from the insured
Receipted Bill from the repairer if paid by insured
Settlement of Claim: On the basis of survey report and claim
documents the insurance company determines the extent of its
liability and the loss is indemnified. The insurance company
may get the vehicle repaired instead of making cash payment
to the insured in case of damage of motor vehicle.

42
Claims for Theft or Total Loss Claims:
Total losses can also arise due to theft of the vehicle and its
remaining untraced by the police authorities till the end. These losses
have to be supported by a copy of the First Information Report (FIR)
lodged with police immediately after the theft has been detected. If
the police authorities do not succeed in recovering the vehicle for
theft claims, the insurer is requested to submit the certificate of side
No. or CR No. Certification of true and undetected R.C. books and
taxation certificate of vehicle along with documents related to vehicles
and insurers. On the basis of investigation or inspection with valid
documents the insurance company determines the total loss or theft.

Claims for Third Party:

On the receipt of notice of claim from the insured, or the third party or
from Motor Accident Claims Tribunal, the matter is entrusted to an
advocate. The insured is requested to submit full information relating
to accident along with the following documents:
Driving licence
Police Report
Details of Drivers prosecution
Death certificate
Medical certificate
Details of age, income, no of dependents etc.

43
On the basis of the written statements the matter is then filed with
Motor Accident Claims Tribunals by the Advocate, the MACT
determines the amount of claims to the third party.

A claim is not honoured under the following circumstances:

Any accident outside the geographical boundary of India
Any accident when the vehicle is driven by a driver without a
valid license.
Person driving under the influence of liquor or drugs
Wear and Tear: Consequential loss, depreciation, mechanical
or electrical breakdown, failure or breakages.
War and allied perils
Carrying of persons or goods more than the permitted capacity
by R.T.O

Current Scenario

Now, ensure an ambulance cover with car insurance:

44
Motorists insuring their vehicles can now be assured of a private
ambulance to transport them to hospitals in case of an accident. The
Western Indian Automobile Association (WIAA) has launched a motor
policy that goes beyond insuring the vehicle.

The AA policy is the first one to be provided by an automobile

association. WIAA has tied up with Japan based IFFCO-Tokyo
General Insurance Company to provide the insurance cover. A victim
covered under the policy will be provided with an ambulance that will
transport the person to the nearest hospital in the shortest possible
time. Five centres have been set up across the city to handle
accident cases reported within the city limits. Later this service will be
extended outside the city.
Under the policy, special towing vans will be used to carry vehicles
that have been damaged. The towing vans will ensure that vehicles,
especially imported cars, are transported to safety without much
damage. According to Mr.Kedia, director-marketing of IFFCO-Tokyo
the biggest challenge is timely adequate claim settlement since the
biggest problem with insurance is the delay in getting claims.

Get ready for roadside service from motor insurers:

45
Insurance Companies will soon be able to offer value added services
such as roadside assistance to motor policyholders. Spains Mapfre
Group, which provides infrastructure support to insurers providing
motor assist programmes world wide is setting up shop in India.
Mapfre is seeing a big opportunity in India after insurers get complete
freedom to design insurance policies from April, 09. At present,
insurers cannot provide wider than the standard motor insurance
cover although they are free to set prices.

At present, Mapfre Asistencia is present in the country in the form of a

fully owned subsidiary- India Assistance. India Assistance will launch
itself roadside assistance services, under which they will provide
services for any kind of breakdown or accident. Customers need to
dial the call centre numbers and report the problem, following which a
suitable vendor will be notified and sent to the spot, to either fix or to
tow the car away. In serious problem, the company will even provide
the customer with a replacement car.

India Assistance aims to tie up with more than 3,000 service

providers for its roadside assistant services. The company will offer
these services to insurers, who have the option of coupling it with
their motor-insurance products as a value, add. The services will also
be offered to other corporates who wish to offer it to their employees
as well as automobile companies.

Case Studies

46
Changing Trends in Commercial Vehicles Insurance in India:
Swami Dorai, the owner of a transport company was giving
instructions to one of his truck drivers in the wake of new guidelines
for insuring commercial vehicles.
"Drive carefully, complete this trip without any major repairs," he said.
His truck driver asked him the reason for the emphasis on repairs.
"Following a burgeoning loss ratio, the state-run general insurance
companies are no longer going to provide comprehensive insurance
cover to commercial vehicles (CVs) over seven years old," replied
Dorai.
Insurance companies issued a circular directing branch and divisional
offices to stop accepting comprehensive insurance policies for
vehicles over seven years old from 2002. According to the circular,
commercial vehicles over seven years old will be insured only for
third-party liability. Comprehensive insurance policy covers third-party
liability as well as damages suffered to vehicles. The insurance cost
for motor vehicles was perceived to be too high. Dorai went to meet
Krishna Reddy, the divisional manager of National Insurance
Company which had insured all his vehicles, to talk about the issue.

Although the company has not stopped insuring old commercial

vehicles, it has changed the mode of accepting premiums. These will
henceforth be accepted only at liability, said Reddy. Comprehensive
cover is being discouraged. However the decision to provide
comprehensive cover has been left to the discretion of field officers.

47
The objective of regulation has been to make insurance available to
all motor vehicle operators. Though Mr Dorai possesses old vehicles,
the vehicles are in good shape and the insurer is benefiting as his
claims are less than what he pays as premium, thus he asked Reddy
to increase the premium amount. Reddy then told Dorai that taxies
carry more passengers than prescribed. In case of accidents causing
death or injury, the insurance companies have to bear the liability of
all the passengers, even if there are more than the numbers
prescribed.

Thus the insurers make huge losses as the claims exceed the
amount collected through premiums. This is one reason why
insurance companies are discouraging third party cover and have
curtailed commission to agents. The other reason is that the insurers
have detected fraudulent transactions while claiming damages.

Solution:-The insurers should not to provide insurance for commercial

vehicles as the claims ratio in the motor vehicle insurance category
has been consistently high in the past. It is necessary to develop
fleet safety programs (by transporters).

IRDA and the Changing Tariff Structure for Motor Vehicle Insurance in
India:

48
What happened to the new tariff structure proposal by the Insurance
Regulatory and Development Authority of India (IRDA)?" asked
Charles De Cunha, owner of a transport service. "It's been deferred
for the moment," said Rao, friend of De Cunha. De Cunha's company
rents vehicles like cars, jeeps, luxury buses and other commercial
vehicles. The travel agency is located in Chennai, India. De Cunha
recently discovered that IRDA was planning drastic changes in the
proposed tariff structure for automobile insurance.

"Why has it been deferred?" asked De Cunha. "The IRDA has

postponed it temporarily to bring in some more refinements," replied
Rao. "Are you sure that the new proposal is going to come through?"
asked De Cunha.
"I hope so," said Rao. He added that N.Rangachary, the Chairman,
had revealed that IRDA was likely to announce the rationalized tariff
structure for motor vehicles insurance by the middle of May. "Do you
know anything more about the new tariff structure?" asked De Cunha.
"Yes, the new tariff structure has been evolved by the Ansari
Committee. It was actually supposed to be effective from April 1, but
in order to bring in more refinements, IRDA postponed it," said Rao.

Is there any modification in the structure evolved by the Ansari

Committee? asked De Cunha. To my knowledge, there are three
major modifications made to the Ansari Committees
recommendations,replied Rao.
According to Rao, the modifications are:

49
 The rates of depreciation that the insurance companies will be
allowed to deduct from the Insureds declared value have been
raised.
There are plans to reduce the country into two zones
Concession in the premium for vehicles with anti-theft devices

Dividing the country into two zones will be beneficial. Chennai and
New Delhi are in top zone and as of now the tariff structure will be
high if the country is divided into four zones. But by reducing it to two
zones, the tariff rate will be reduced for both Chennai and New Delhi.

Solution:-IRDA is close to notifying the IRDA Regulations, 2002.

These regulations deal with the disclosures that are to be made at the
point of sale. In addition to this, the regulations stipulate the time limit
within which the insurance companies must act under various
circumstances. For instance, insurance companies have to furnish a
copy of the insurance proposal form to the insured within 30 days of
acceptance of the proposal. Queries too have to be raised at once
within a period of 15 days.

Issues and Challenges

50
The Motor Insurance industry in India has been in existence for a
long time. The market, like other insurance markets in India, has
been detariffed and thus different players can come up with different
products and not be bound by the tariff rules laid down by the Tariff
Advisory Committee (TAC)

Motor Insurance in India in some sense has been similar as

anywhere else in the world- there have been different kinds of
products but mainly the protection is towards any damage suffered by
the insured. This means that the insured could claim damages from
the insurance company against the costs for damages caused due to
an accident. Further, the insurance company also provided incentives
to the insured in terms of No Claims Discount i.e. if there was no
claim made in a particular year; the insured would get a discount on
the premium of the next year subject to a maximum discount
possible. All these are in line, at least, with the automobile insurance
policies in force in a number of developed markets.

However, there have been differences in the way these policies have
been implemented in India. These issues have been existent for a
long time but never came to the fore in the days of the tariff regime
and government controlled insurance market. But with about a
decade of liberalization of the insurance sector in India and the
detariffication of the market in recent times, some of these issues

51
have become really relevant and needs to be looked at with greater
scrutiny. Some of the major issues are as follows:
The age of the driver and the age of the driving license have no
relation to the premium amount:
The likelihood of an accident due to speeding is linked to two main
factors:
Age of the driver
Age of the driving License

It has been observed that younger drivers are more prone to

speeding and thus have a higher probability of being involved in high
speed crashes and accidents leading to huge claims on the insurance
policies. Very old drivers have been observed to have high probability
in being involved in accidents due to their slowness in reflexes or
other medical conditions.

Internationally, mainly in the developed world, these conditions are

considered while pricing the motor insurance policies. This implies
that young and new as well as old drivers pay more in terms of
premiums on their motor insurance policies as compared to middle-
aged drivers with a relatively old driving licence. This kind of
movement on the premium values is needed to ensure that the
insurance company is well covered in terms of the risks it faces by
selling the insurance policies.

52
However, Indian markets observe none of these. In fact, the
insurance premium is dependant not on the age or the experience of
the driver but on the age of the policy in question. This is not
necessarily the best strategy, especially from the perspective of the
middle-aged experienced driver who should see a reduction in the
premium cost but in effect sees no different from someone such
younger and inexperienced. Similarly, the insurance company is not
compensated for the additional risks it takes by insuring old drivers as
the premium charged cannot be modified to take care of such issues.

The type of the car has no relation to the premium charged:

This is another major issue that needs to be tackled by the motor
insurance industry in India. It is a fact that the premium on the car is
dependent on the size of the engine of the car, but then it has to be
realized that other factors also need to be taken into consideration
while determining the premium value for the insurance. For instance,
lets assume that there are two cars with the same engine size. But
let one car be a sedate family car while the other is a sports car.
Obviously, the premium of the sport car should be more- that is
because the likelihood of a sports car speeding and therefore being
caught in an accident is higher than that of the family car. Such
issues or factors need to be considered by the insurers while
formulating the policies and deciding on the level of premium
associated with the policies.

This is something that is yet to be done in a large way in India. One

standard reason why it is not so prevalent is the fact that there are

53
very few sports cars in Indian markets, as compared to the motor
market in any developed country.

The No Claims Discount policy in effect lands up subsidizing

the Bad Drivers at the cost of the Good Drivers:
All automobile insurance policies in India, as in any other part of the
world have No Claims Discount system built into them. This is
effectively used as a means of rewarding Good Drivers for the fact
that they have been good drivers and not caused any accidents
which has resulted in claims to be settled by the insurer. There have
been a large number of studies that have been carried out on the
need of such schemes as well as the efficacy of such schemes.

While such schemes are useful for both the insurer (over a period of
time, the amount paid out as premium decreases) and the insured
(has better information about the insurer and hence can plan better),
it has often been seen that the schemes are not appropriately
designed. What this results in is the fact that the better drivers end up
in subsidizing the not so good drivers.
An effective No claims Discount scheme should not have such
biases and insurance companies should look at their portfolio and try
and ensure that such biases do not remain.

A point that needs to be made here is the fact that such biases would
be removed with the availability of better information about the driving

54
habits and patterns of the insured population. This is an issue in India
as the information that is available to the insurers is only based on
the information reaching them when a claim is made. In large number
of cases, the policyholders do not make a claim because the no
claims benefit exceeds the cost of repair and thus makes sense to
get it repaired without making a repair.

The Claims settlement process is really not completely geared

up to meet all kinds of challenges:
This has been the single largest issue in the automobile insurance
sector in India for a large number of years. The basic problem is the
authenticity of the claim made and the time taken to settle the same
by the insurance company. While insurance companies have made
significant strides towards the timeliness of the disbursement of the
accepted claims and in large number of cases there are cashless
claim settlement processes which are in place but all these work on
the premise that the claims are accepted as genuine by the insurer.

Conclusion

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Motor Vehicle Insurance falls under General Insurance. Its
importance is increasing day by day. In Motor Insurance the owners
liability to compensate people who are killed or injured through the
negligence of the motorists or drivers is passed on to the insurance
company. Motor Insurance business is the largest single section of
accident insurance, if judged by premium income, but this relates to
motor business as a whole.
Insurance growth has been galloping in the recent years. The
insurance industry in particular has been subjected to numerous
changes in the last few decades since the need for insurance is more
evident now than earlier. Peoples spending patterns are changing
and more and more resources are needed for immediate
consumption. In early 1990s, the joint family system had provided
protection in case any unfortunate incidents were to occur to any
individual of the family, but after the advent of industrialization, the
joint families have split into single nuclear families.
Thus, insurance has become the most reliable tool an individual can
use to plan for his future.
Motor insurance today constitutes 60% of the portfolio for most of the
general insurance companies in the world. The trend would be the
same in India also. In 5 years, the motor insurance is slated to
increase from Rs. 8,000 crores to Rs. 20,000 crores. Currently, it is
41 % of the total general insurance business up from 36% five years
back.

The automobile insurance industry has certain issues to face up to

resolve. That will ensure the fact that it shall be more efficient and

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geared up in tune with the growth in the automobile industry in India.
Some of the issues are due to legacies that the insurers carry, some
are due to certain mindset issues that both the insurers and insured
have on certain issues which are due to data-related factors.
Whatever may be the issue, one has to look at possible ways to
address them, learn from markets that have addressed them
successfully. This will make the industry stronger and more resilient.

The current state of motor insurance as prevailing today can at best

be summarised as below -
Insurance has become the important driver for dealer
profitability and customer satisfaction.
Motor insurance especially private cars, is an area which all
insurers want to develop.
Continuous increase in cost and charges for labour & parts and
higher awards for third party claims are pushing the claims ratio
up.

Bibliography

57
Reference Books:
Motor Insurance by V.B.Kolhatkar
Insurance by P.K.Gupta
Insurance by Julia Holyoake
Principles and practice of Insurance by Dr. P.Periasamy

Newspapers:
Economic Times
Your Money
DNA Money

Search sites:
www.autoinsurance.com
www.irda.org
www.insuremust.com

Search engines:
www.wikipedia.com
www.google.com
www.indianinfoline.com

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