Understanding Motor Insurance Premium

Computation of Insurance premium based on IDV, Tariff Rate, NCB and Discount

Motor Insurance / Auto Insurance / Car Insurance is a subject we normally struggle with every year at the time of annual renewal of car insurance policy. Proper understanding of various terms and how premium is determined will not only enable us to understand different component of the insurance premium but also let us negotiate better deal.

Motor Insurance policies are broadly of two types:

A. Liability Only Policy: Motor Insurance policy is required to be taken for all motor vehicles plying on road. Motor vehicles can cause bodily injury to third parties or cause damage to public or private property. To cover this risk, Liability Only Policy is compulsorily required by law. This policy covers Third Party Liability for bodily injury and/ or death and Property Damage. Personal Accident Cover for Owner-Driver is also included.

B. Package Policy: Also referred to as Comprehensive Policy, it covers loss or damage to the vehicle insured in addition to (1) above. It is more prudent to take a Package Policy which would give a wider cover, including cover for your vehicle. Majority of the motor insurance policies are package policies. Premium for Package policy can be arrived at by adding Own Damage Premium to premium for Liability Only Policy.

Premium for Liability Only Policy

Third Party Liability insurance is mandatory for all vehicles plying on public roads in India. This covers Liability for injuries and damages to others that you are responsible for. The premium cost for Third Party Risk cover is decided by the Insurance Regulatory and Development Agency (IRDA) and is the same for all companies providing car insurance in India.

Premium for Liability Only Policy is sum of the following:

1. Basic Third Party Liability: Rates applicable are as follows:

Private cars Third Party Premium from 1-Apr-2014 (Rs)
Not exceeding 1000 cc 1,129
Exceeding 1000 cc but not exceeding 1500 cc 1,332
Exceeding 1500 cc 4,109

It is to be noted that the Third Party Premium rates were revised by IRDA with effect from 1st April 2014. Rates applicable prior to revision was as below:

Private cars Third Party Premium from 1-Apr-2013 (Rs)
Not exceeding 1000 cc 941
Exceeding 1000 cc but not exceeding 1500 cc 1,110
Exceeding 1500 cc 3,424

2. Compulsory Personal Accident Cover for Owner-Driver: Rs 100 is charged and Sum Insured is Rs 2 lakhs.

3. Optional Personal Accident Cover for persons other than Owner-Driver: Rs 100 is charged and Sum insured is Rs 2 lakhs, for unnamed passengers as per the registered carrying capacity of the vehicle.

4. Legal liability for paid driver: Rs 50 is charged

Premium for Package Policy

Premium for Package Policy is arrived at by adding Own Damage Premium to premium for Liability Only Policy.

Own Damage Premium: Calculation of Own Damage Premium depends on the factors such as Insured’s Declared Value (IDV), Tariff Rate, No Claim Bonus and Discounts. Premium is arrived at by multiplying IDV with Tariff Rate, and deducting No Claim Bonus and various discounts thereon. Let us understand each of the terms.

1. IDV of the vehicle: IDV is the Sum Assured or the cover provided by the insurer. IDV is the maximum amount which the insurer agrees to compensate you with in case your vehicle is stolen or damaged beyond repair. IDV is calculated as the market value of the car at the time of insurance. For new cars, IDV is calculated on the basis of car’s ex-showroom price. While renewing the insurance, the IDV will be adjusted for any depreciation it has undergone over the time, as per below table:

Age of the Vehicle % of Depreciation for Fixing IDV
Not exceeding 6 months 5%
6 months to 1 year 15%
1 to 2 years 20%
2 to 3 years 30%
3 to 4 years 40%
4 to 5 years 50%

The IDV of vehicles aged over 5 years is calculated by mutual agreement between insurer and the insured.

2. Tariff rate: refers to the rate at which insurance premium is payable. These rates are prescribed by IRDA and vary according to geographical location, cubic capacity and age of the vehicle.

i. Geographical Zones: Motor insurance premium depends on registration place of vehicle. The premium in Tier I cities is comparatively more than Tier II and Tier III cities. That is because probability of insurance claim is more in Tier I cities because of higher costs, higher possibility of thefts, etc. For the purpose of Tariff Rates, two zones as below are prescribed:

Zone A: Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi and Pune
Zone B: Rest of India

ii. Cubic Capacity: refers to the capacity of vehicle engine. More the cubic capacity of the vehicle, higher will be the insurance premium.

iii. Age: Older the vehicle, higher is the premium.

Tariff Rates for Own Damage cover is as below:

Age of the vehicle Zone B Zone A
Cubic Capacity Cubic Capacity
Less than 1000 cc More than 1000 cc but Less than 1500 cc More than 1500 cc Less than 1000 cc More than 1000 cc but Less than 1500 cc More than 1500 cc
Less than 5 years 3.039% 3.191% 3.343% 3.127% 3.283% 3.440%
More than 5 years but Less than 10 years 3.191% 3.351% 3.510% 3.283% 3.447% 3.612%
More than 10 years 3.267% 3.430% 3.594% 3.362% 3.529% 3.698%

3. No Claim Bonus (NCB): is an important variable which affects the premium amount. NCB discount is available if no claim is made in the previous year. NCB gets accumulated over the years and can go upto 50%. However, NCB is lost as soon as any claim is made. It is to be noted that NCB can be earned only on Own Damage Premium. NCB is available at the renewal of a policy after the expiry of the full duration of 12 months. No Claim Bonus, wherever applicable, will be as below:

4. Discounts: In addition to NCB, IRDA has prescribed discount on Own Damage Premium for Installation of anti-theft devices, membership of Automobile Association of India, opting for voluntary deductible/excess, etc.

Most important factor to keep in mind while finalizing motor insurance premium is the discount on Tariff Rate. Motor Insurance premium rates are largely tariff driven and prescribed by IRDA. While Tariff Rate for own damage premium are prescribed by IRDA, insurance companies have freedom to offer discount on the Tariff Rate. Negotiate with insurance company for higher discount on Tariff Rate in order to lower Motor Insurance premium.

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