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Beginners Guide to How Car Insurance Works in India, How Car Insurance Premium is Calculated? (2020)

Apr 15, 2020 12:56 PM 7 min read
Editorial

We will try to shed some more light on car insurance now by extending our beginner's guide - how does car insurance work in India, how much does a car insurance policy cost, how to calculate your insurance premium, and how to claim your car insurance.

 

 

How Does a Car Insurance Work in India?

Car insurance works on a “use it or lose it” policy. 

 

In order to avail a car insurance policy, the policyholder needs to pay an yearly premium, which is based on multiple factors including the make and model of the vehicle, the type of coverage and the value and age of the vehicle, and your claim history.

 

Now you either claim the policy, or you lose the amount paid for protection. 

 

In case the policy is not claimed, the policyholder gets a No Claim Bonus (NCB), which can be a pretty substantial amount - often beginning from 20% of the premium in the first year to 50% in the sixth.

 

This is also why it’s sometimes advised not to claim for minor damages.

 

How Much Does Car Insurance Cost in India?

The cost of insuring the vehicle represents the premium amount. Now that depends on several factors, varying from policy to policy.

 

There are two main components, namely ‘Liability Premium’ and ‘Own Damage Premium’.

 

Car Insurance Premium Breakdown - Own Damage Premium and Liability Premium
Car Insurance Premium Breakdown - Own Damage Premium and Liability Premium (representative image)

 

It is integral to note here that the Liability Premium is fixed by the insurer. It is the minimum statutory premium to be paid as fixed by the Insurance Regulatory and Development Authority of India (IRDAI), and is dependent on the engine power of your car. More the cubic capacity, more will be the premium.

 

For example, here's the third party Liability Premium thresholds as set by the IRDAI for financial year 2019-20:

 

Third party liability premium chart released by IRDAI for financial year 2019-20
Third party liability premium chart released by IRDAI for financial year 2019-20

 

 

Car insurance premiums can be calculated using the below formula:

Premium = Own Damage Premium – (NCB + Discounts) + Liability Premium as Fixed by the IRDAI + Cost of Add-ons

 

Moving on, we shall look at the factors that influence the Own Damage Premium.  

 

Factors That Determine Own Damage Premium

Insured Declared Value (IDV) of the vehicle

It is essentially the maximum amount a policyholder can claim for any loss or accident of the vehicle and thus one of the important factors that greatly affect the Own Damage Premium.

 

IDV is the current market value of the vehicle minus the depreciation on its parts. For any accessories fitted separately, the IDV is calculated separately as:

IDV = Ex-Showroom Price of Your Car + Cost of Accessories (if any) – Depreciation Value as per IRDAI

 

Depreciation

As per India Motor Tariff, the depreciation rates are different for different aspects/parts of the vehicle.

 

  • The rate of depreciation for nylon/plastic parts, rubber parts, tubes and tyres, batteries, and airbags is 50%
  • The depreciation rate for fibreglass parts is 30%
  • For all car parts made of glass, the depreciation rate is nil

 

For instance, if your car goes through an accident and the rear bumper paint is damaged, your service center will charge you 50% of the cost of paint. The rest (i.e. Cost of labour + remaining 50% of the cost of paint) is taken care of by the insurance company.

 

The rate of depreciation for all other parts ranges from 5% to 50% of the ex-showroom price and is as per the below:

 

Rate of depreciation for all other parts as percentage of ex-showroom price
Rate of depreciation for all other parts as percentage of ex-showroom price

 

 

No Claim Bonus (NCB)

In order to reward a policyholder for being a responsible driver, insurance companies have come up with the concept of NCB. A policy holder is entitled to a NCB discount if he/she has not made a claim the previous year. 

 

If you have a NCB component in your policy, you can save up to 50% on the own damage (OD) premium.

 

It is important to note here that one needs to pay extra premium for NCB protection.

 

Needless to say that this is not applicable for first time applicants. 

 

Type of the Vehicle

It is only obvious that high-end cars such as Bentley or Audi are insured at a higher cost when compared to more affordable vehicles like Swift or Baleno. Likewise, SUVs are charged higher insurance premiums than ordinary family hatchbacks.

 

Crashed BMW

 

Geographical Location

Considering the high density in cities and the greater chances of the vehicle getting involved in an accident, and the comparatively greater incidents of theft, policyholders have to shell out a higher amount to get a car insured in a city. 

 

Age

Individuals below 25 years of age are considered to be more risky drivers. Hence, insurance providers offer car insurance at a higher premium for people in the age group of 18 years to 25 years.

 

Fuel Type

A CNG fitted car will be costlier to insure than diesel and petrol models. Also, a diesel car will attract a higher insurance premium than a petrol car. This is due to the following reasons:

 

  • A diesel car is more expensive than a petrol car, all else equal. Since the premium for car insurance is directly proportional to the cost of the car, the premium will be higher for the diesel variant.
  • It is more expensive to get a diesel car repaired post an accident, when compared to a petrol car.
  • Diesel cars have gained a lot of popularity in the recent years. When diesel cars became as attractive as their petrol variants, the insurance premiums for these vehicles also witnessed a hike.

 

Anti-theft device Installation

A vehicle with an anti-theft system and other security features lowers the risk of loss. This can lead to a lower premium cost.

 

Deductibles

A car insurance deductible is the amount of money the policyholder has to pay toward repairs before the insurance covers the rest. To illustrate, if you’re in an accident that causes ₹3,000 worth of damage to your car and your deductible is ₹500, you will only have to pay ₹500 toward the repair. The insurance company pays the remaining ₹2,500.

 

If you agree to raise your deductibles, hence decreasing the amount that the insurance company has to give in your claim, they usually offer a low premium.

 

Car accident

 

How to Claim Your Car Insurance

Third-Party Claim

How to make a third party insurance claim?

  • If your vehicle causes damage to a third-party, ensure that you immediately report the accident to the police as well as your insurance company
  • If you are the victim of the accident, you must get the insurance details of the third-party vehicle and inform their insurer
  • After getting a notice from the third-party or the insured, the insurer will transfer the matter to a tribunal
  • The tribunal decides the penalty amount
  • The insurance company then pays or compensates this amount

 

Own Damage Claim

Wondering how to claim own damage insurance?

  • In case of damage to your vehicle, inform your insurance company within a week.
  • Any delay could result in claim rejection
  • An independent surveyor examines the vehicle to assess the reason and the extent of the damage
  • You or the insurance company will then take the vehicle to the nearest garage
  • After a thorough examination of the incident, your insurer will send an approval
  • You pay a minimum amount of the bill. The rest will be taken care of by your insurer
  • Or if you pay the whole bill amount, the insurer will compensate you

 

Theft Claim 

How to claim car insurance in case of theft?

  • Inform your insurer and the police
  • Submit documents such as the copy of your vehicle’s registration certificate, your driving licence, etc
  • Some insurance companies also ask you to submit the keys of your vehicle
  • After a reasonable amount of time, if the police still cannot locate your car, it issues a non-traceable certificate
  • Your insurance company then proceeds towards settling your claim
  • It will compensate you for an amount equivalent to your car’s value

 

However, never forget to read the policy wording carefully to understand exactly about the policy coverage, exclusions etc before picking one. Also its always a good idea to comprehensively compare the top car insurance providers in India, head here.

 

FIN.

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