Professional Documents
Culture Documents
Motor Insurance
Motor Insurance
1
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
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.
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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 1st July 1989.
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Meaning
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Need for Motor Insurance
7
Principles of Motor Insurance
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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 insured’s 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
Garbage dumping trucks, road rollers etc.
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Types of Motor Insurance Available
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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 one’s vehicle. Since a
single policy cannot meet all the insurance objectives, one should
have a portfolio of policies covering all the needs.
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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.
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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.
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.
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.
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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 driver’s 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.
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.
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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.
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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
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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.
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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.
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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.
20
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.
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efforts of the claimants or the insurers. It defines the terms such as
grievously hurt, death by hit and run motor accident.
22
Where death has resulted from the accident, by all or any of the
legal representatives of the deceased.
23
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.
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a Claims Tribunal if the amount in dispute in the appeal is less than
ten thousand rupees.
25
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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parties. While the insured is treated as the first party and the
Insurance Company second party, all others would be third parties.
Package policy: This policy covers all the risks of liability policy as
well as the loss of or damage to insured’s 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
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.
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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.
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.
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limited to Rs 6,000 only. This limit can be enhanced on payment of
additional premium.
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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
Indian Motor Tariff unless specifically authorized by the Tariff Advisory
Committee. Some of the important General Regulations under Indian
Motor Tariff are as follows:
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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.
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
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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.
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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.
33
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 insured’s request to take advantage of
pending rate changes, refund of premium must be calculated on short
period basis.
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In case of temporary substitution
In respect of Motor Trade Risk
Documents
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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
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.
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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.
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:
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
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has to select a correct value of the vehicle and declare the same for
insurance. This value is known as the Insured’s 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.
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.
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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.
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.
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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
and spare parts and escalating awards for third party claims, control
of claims cost is imperative.
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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 company’s office and thus take
longer time.
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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
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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 Driver’s prosecution
Death certificate
Medical certificate
Details of age, income, no of dependents etc.
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.
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Carrying of persons or goods more than the permitted capacity
by R.T.O
Current Scenario
44
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.
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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.
Case Studies
46
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.
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
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curtailed commission to agents. The other reason is that the insurers
have detected fraudulent transactions while claiming damages.
IRDA and the Changing Tariff Structure for Motor Vehicle Insurance in
India:
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"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.
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.
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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.
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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
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in being involved in accidents due to their slowness in reflexes or
other medical conditions.
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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,
let’s 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.
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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
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.
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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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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.
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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
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
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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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