IRDA has increased premiums for automobile insurance with effect from 1 April 2012. Insurance companies have come up with a new trick of using only the engine cubic capacity. The smaller and cheaper cars and bikes are subsidising the bigger and costlier ones

Insurance regulator, Insurance Regulatory and Development Authority (IRDA) has increased premiums for automobile insurance with effect from 1 April 2012. We see all sorts of new calculations on the scribble sheet that often accompanies the proposal which is also found on the cover note as well as the policy. The net result is that in some cases you can anticipate an increase of almost 50% over what you paid last year for the same vehicle, especially if it is a smaller car or a two-wheeler.

Of course, another truth is that the value of your car or bike is also going to depreciate faster. So with a lower cover, the premium amount also comes down for an existing vehicle—though that is cold comfort in case anything does happen to your wheels. However, in an attempt to see that they continue to collect as much as they can from you without increasing the coverage, the insurance companies appear to have come up with a new trick.

Take a closer look at the way the compulsory Third Party Risk and insurance premium is now calculated. Here are the details, and in all cases, taxes and other surcharges extra at actuals:

Private Cars:

< 1000 cc             =    Rs784.00

1000cc - 1500cc =    Rs925.00

>1500cc               =    Rs2,853.00

Private two- wheelers:

<   75cc                 =  Rs350.00

75cc - 150cc        =  Rs 357.00

150cc - 350cc      =  Rs355.00

>350cc               =  Rs 680.00

Is this fair? I discussed this with a very senior person in the insurance industry in India, who has been in the business for over three decades been working in the public sector and knows the subject. Here’s a quick re-cap:

# There appears to be no differential rate for private cars registered and used by private individuals and private cars registered and used by government, corporates and companies. The presence on road, distance covered and therefore potential for causing damage to other road users is so much higher in these two categories, and has not been provided for.

# Third Party risk is basis the damage your vehicle can cause. A more powerful vehicle shall cause more damage and the premium should be much higher—preferably in terms of a composite of horsepower generated, maximum all-up gross weight and value. Using only the engine cubic capacity alone is a flawed method.

# As a result of using only the engine cubic capacity, it is clear that the smaller and cheaper cars and bikes are subsidising the bigger and costlier ones. A typical < 1000cc car would cost around Rs3-Rs4 lakh while the price of a >1500cc car would range from Rs8-Rs10 lakh all the way up to Rs3-Rs5 crore. That huge Audi Q7 or Mercedes Benz E Class or BMW 5 series will cost only 4-5 times more to insure for Third Party insurance while costing 50 times or more—and let’s not even talk about the Rolls Royce or Bentley or Aston Martin which would cost 200 times more than the Tata Nano.

# Goods vehicles are categorised and charged as per their maximum gross vehicle weight, which is also not totally correct, but is a far better way than going only by cubic capacity. Likewise, cars, three-wheelers and bikes used for carrying passengers have another formula, which also brings in the number of passengers to be carried and therefore covered.

The best co-relation that this person from the insurance industry gave went something like this: An additional cost of Rs5 is levied on the pao-vade that people eat at Dadar for Rs10, so that the person eating a full meal at a 5-star hotel has to pay only Rs50 for the Rs2000 bill—and entry to the 5-star is permitted only to those who drive up in a car costing over Rs20 lakh.

(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)