Third-party cover may pinch more

Third-party cover may pinch more
IRDA Examines Proposal That Seeks Highest 137% Hike For Entry-Level Cars
Udit Prasanna Mukherji TNN

Kolkata: Come April, your third party (TP) motor insurance will start pinching your pocket more. The Insurance Regulatory and Development Authority (IRDA) is examining a proposal seeking an almost 50% weighted jump in TP motor insurance for private cars across all subclasses in the exposure draft for revision of premium.
The revision will hit owners of the entry-level cars – below-1,000CC segment – the most as the rise in TP cover proposed for this category is 137%. This high-volume segment includes cars like Alto, Eon, Spark and Nano. The overall increase in the insurance premium, including own damage (OD), will be around 23% for these entry-level cars.
The minimum increase in TP premium – around 23% – will be seen in the above-1,500 CC category, which includes Swift Dzire, Honda City, Vento. For above-1,000CC but lower than 1,500CC cars, the premium will jump by 48%. The overall rise in insurance premium, including own damage, will be below 10% in this category that has cars like Ritz, Swift, Hyundai Santro, i10 and Beat, among others.
TP premium for commercial vehicles will increase too in most cases. However, this will be minuscule as experts feel that being an election year, a steep increase in premium of commercial vehicle will have an impact on commodity prices. IRDA has argued that the rate hike is being proposed because the average claim size for TP has gone up by 27% in different categories.
Unlike own-damage insurance, which is optional, third party motor insurance is mandatory for all car owners – be it private or commercial. The idea behind TP motor insurance is to settle the claims of victims, other than car owners. The own damage insurance covers the car and the owner/ driver. Till 2011, there was a TP pool managed by GIC. However, after 2012, the pool was discontinued as IRDA felt that it would lead to better management of TP claims and the loss ratio will come down.
Former IRDA member K K Srinivasan feels that the proposed increase in motor TP premium looks unfair. “In case of private cars up to 1,000 CC, the increase is 137% and for motor cycles of 100-150 CC the jump is 50%. But there is an irony. Indian Information Bureau (IIB) on whose data the increase is based admits in its disclaimer that it has not validated the data and has uploaded the data as validated by the insurance company concerned. It also frankly admits that “there could be errors & omission”. Significantly, one of the publication that studied the health insurance reports of IIB a couple of years ago commented that “the reports are riddled with errors,” he added.
He pointed out that it is high time that IRDA gives up fixing motor TP premium, giving assured premium increases to insurance companies at regular interval
An official of a public sector general insurer said loss ratio in TP is still quite high. “It is around 80-90% across different categories. Anything beyond 55% means the insurance companies are making losses because around 45% is other expenditure in a policy that includes reinsurance premium,” he added.

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LIC India Update

 Latest update about LIC of India 

Some major changes are going to happen in life insurance industry from Jan 1, 2014, especially in traditional policies like Endowment Plans, money-back plans and even ULIP’s. You will surely have a LIC policy or any other private sector traditional plans or might buy them in coming times. Here are 5 major changes which you should be aware about and they will come  into effect from Jan 1, 2014.

1. Service Tax introduced in LIC Policy Premium

Till now LIC was not charging the service tax of 3% from the customers and paying it to govt from the pool of money collected itself, but now the service tax will have to be charged separately from policy holders. Which means that if your LIC premium was Rs 50,000 per annum, now it will be 3.09% higher in first year, which is Rs 51,500  and after 1st year, it will be 1.545% 

While customers see it as additional burden, note that its not the case exactly, Earlier – LIC was paying the service tax from the pool of money collected from investors only, which reduced the bonus amount given back to them. But now because it will not be taken out from the funds, that means the bonus declared each year will go up by that much margin and will come back to investors only. Note that Pvt companies were charging the service tax already, so nothing changes on their side. Only LIC was not charging it separately, which they will have to do from Jan 1, 2014 deadline.

2. Increase in Surrender Value

One of the major changes which has happened, is the change in surrender value for policy holders. The rules of surrender value depends on the premium paying term of the policy. If the premium paying term for policy is less than 10 yrs. Then the policy will acquire the surrender value after paying premium for 2 yrs (earlier it was 3 yrs), however if the premium paying tenure is more than 10 yrs , then the surrender value will be acquired only after paying 3 yrs premium.

In both the cases, the minimum surrender value would be 30% of the premiums paid without excluding the first year premium. Note that earlier, if you used to surrender after paying 3 premiums, you got 30% of premiums paid MINUS first year premium, but now as per new rules, the first year premium will not be deducted. Learn everything about LIC policies working before Oct 1

Another good change is that, from 4th-7th year, the minimum surrender value would be 50% of the premiums paid, and has to reach 90% of premiums paid in last 2 yrs of policy paying tenure.

3. Possible Decrease in Premium on LIC Policies

There is a great possibility that the premiums on LIC policies will come down by some margin, because the mortality rates will now be revised by LIC in calculating the premiums.

Mortality rates are the rates at which the insurance company deducts the fees for insuring you based on your age. LIC had been using old mortality rates till now, but now they will have to use new mortality rates . Just to give you an idea on reduction of premium, when I check the mortality rate for a 40 yrs old person in old table, its 0.001803 . But in new rates its 0.002053 . Which is approx 10% better. Lets not go into detailed calculation at the moment, but your risk premium part should go down by 10% (not the full premium, because only some part of whole premium in traditional policies are risk premium and rest is investment part) .

4. Higher Death Benefit

If the policy holder is above 45 yrs of age, then the Sum Assured has to be more than 10 times the annual premium, and for those who are less than 45 yrs old, it can be minimum 7 times the premiums. Note that for claiming the tax exemptions, your sum assured has to be 10 times the base yearly premium. So when you buy the policy in-case, you need to keep it in mind. Bima Nivesh has done a great point by point notes on each aspect of regulation, in-case you want to go into details.

5. Agents’ incentives have now been linked to the premium paying term

Now agents commissions is linked to the premium paying tenure. Earlier a lot of agents used to sell the policies which had higher maturity tenure, but limited premium paying tenure (like 30 yrs policy with 10 yrs premium payment) . Here is the new commission structure taken from Moneylife article 

In case of regular premium insurance policies, a policy with a premium paying term (PPT) of five years will not pay more than 15% in the first year. Products with PPT of 12 years or more will have first year commissions up to 35% in case the company has completed 10 years of existence and 40% for the company in business for less than 10 years.

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