The Supreme Court’s decision to extend the upfront tenure of mandatory third-party (TP) motor insurance for new vehicles could mean higher costs for vehicle buyers. Mandatory TP cover for new four-wheelers has been extended from three years to four years, and for new two-wheelers from five years to six years. Existing requirements have been in place since 2018.
Authorities have been ordered to work on measures such as a “no insurance, no fuel” pilot project and use technology, including cameras, to fine uninsured vehicles. The move comes amid concerns that about 56% of vehicles on Indian roads lack valid insurance.
The Insurance Regulatory and Development Authority of India (Irdai) is required to make a representation before the Supreme Court on 14 August, with the matter scheduled for hearing on 18 August.
Irdai may challenge the Supreme Court directive and seek a review following the decision by a two-judge bench, said an industry official on condition of anonymity. “The regulator may ask a larger bench to review it. They are taking inputs from the industry. Next week, we should have more clarity.”
For a new vehicle buyer, the immediate impact could be a higher upfront payment. Instead of paying for three years of TP cover for a car or five years for a two-wheeler, buyers would have to pay for four and six years, respectively, if the court’s direction takes effect in its current form.
“The premium could typically be four times and six times the one-year premium for four-wheelers and two-wheelers, respectively,” said Animesh Das, MD & CEO, ACKO General Insurance Company.
Consumer choice could also be affected. Many buyers may unknowingly prefer the convenience of purchasing the mandatory cover directly from the vehicle dealer.
Motor insurance broadly offers two types of coverage: third-party (TP) and own-damage (OD). TP insurance is mandatory and covers the policyholder’s legal liability towards third parties for injury, death or property damage arising from an accident. It does not cover damage to the policyholder’s own vehicle.
Own-damage (OD) insurance, on the other hand, covers damage to the insured vehicle from risks such as accidents, theft, fire and natural calamities, subject to the terms. OD cover is not mandatory. A policy combining TP and OD cover is commonly referred to as a comprehensive motor insurance policy.
The concern is that a longer mandatory TP tenure could strengthen the dealer’s position at the point of vehicle purchase. While TP premiums are tariffed and the base premium is the same across insurers, dealers can sell OD cover and add-ons alongside the mandatory TP policy to increase their ticket size, thus earning higher commission.
“With this mandatory extension, you are giving too much power to one set of distribution channel,” said Saurabh Vijayvergia, founder & CEO, CoverSure. “Even though third-party premium is the same across channels, dealers tend to price OD along with a series of add-ons that customers may not be aware of or may not need. They end up overpaying most often, as dealers blatantly tell them that they have to buy insurance from them.”
On paper, a policyholder can seek to change insurers during the policy term. “You will have to buy a new insurance policy first. Then you can apply for cancellation of the existing policy. Essentially, you will have two insurance policies until the old insurer cancels your policy and processes the refund,” said Das.
This could make switching cumbersome for aggrieved consumers who want to switch providers. A longer upfront tenure could mean that customers remain tied to the original insurer for longer, unless they are willing to go through the cancellation and refund process.
The key question is whether extending the upfront insurance period will address the segment that is actually driving the insurance gap.
The Supreme Court’s intervention is aimed at improving compliance, but the data suggest the problem is concentrated beyond new-vehicle sales.