Executive Summary

In today’s modern world everything has become far more advanced

and therefore insurance plays a very vital role in every field and

aspect of life. It is oriented towards the growth of nation but also

common man in general. Every transaction that takes place has an

aspect of banking and insurance involved in it.

All the industries that are existing today are all related to the banking

and insurance activities. Thus you can say that banking and

insurance acts as a focal point for all activities. Why is insurance

necessary? The question contains the answer within itself. After all,

life is fraught with tensions and apprehensions regarding the future

and what it holds for the individual. Despite all the planning and

preparation one might make, no one can accurately guarantee or

predict how or when death might result.

Motor Insurance is one of the largest non-life insurance businesses in

the world. This is because it is statutorily mandated in most parts of

the world. All motor vehicles are required to be registered with the

road transport authorities and insured for third party liability. There

are different classifications of vehicles and risks associated with each

are different and the tariffs are decided by the Tariff Advisory

Committee based on such a classification. The basic premise is that

motor vehicles could either cause injury or be a subject of damage

and injury, and thus require insurance.

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The Motor Vehicle Act of 1939 introduced compulsory insurance to

take care of those who might get injured in an accident. Motor

Insurance is more of a hedging mechanism rather than a real

investment avenue. It is essentially a mechanism that eliminates risks

primarily by transferring the risk from the insured to the insurer. The

chances for a fatality or an injury to occur to the average individual

may not be particularly high but then no one can really afford to

completely disregard his or her future and what it holds.

Therefore, Motor Insurance is mandatory for all new vehicles be it for

commercial or personal use. Insurance companies are coming out

with comprehensive policies for its customers.

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Introduction

Motor Insurance is one of the largest non-life insurance businesses in

the world. All motor vehicles are required to be registered with the

road transport authorities and insured for third party liability. The

basic premise is that motor vehicles could either cause injury or be a

subject of damage and injury and thus require insurance. The Motor

Vehicle Act of 1939 introduced compulsory insurance to take care of

those who may get injured in an accident.

There has been a phenomenal rise in the motor accidents in the lat 4-

5 years. Much of these are attributable to a sudden spurt in the

number of vehicles. There is a danger at every corner when it comes

to Indian roads. Therefore, every vehicle being driven on roads has to

be compulsorily insured.

Legally, no motor vehicle is allowed to be driven on the road without

valid insurance. Hence, it is obligatory to get the vehicle insured.

Motor insurance policies cover any loss or damage caused to the

vehicle or its accessories due to the natural and man made calamities

like fire, explosion, earthquake, flood, burglary, theft, riot, strike,

malicious act etc. Motor insurance provides compulsory personal

accident for individual owners of the vehicle while driving. One can

also opt for a personal accident cover for passengers and third party

legal liability. The third party legal liability protects against legal

liability arising due to accidental damages. It includes any permanent

injury or death of a person and damage caused to the property.

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It represents a combined coverage of the vehicles including loss or

damage to his property or life and the third party coverage.

We read everyday in the newspapers about accidents, bomb

explosions taking place. 30 out of 100 vehicles meet with accidents

on the road. You step out of your house and at every moment

encounter number of risks that one cannot imagine. What is worrying

for all of us is not the operation of those risks but the operations that

are accidental, unforeseen and external.

There is hardly any industry i.e. manufacturing activity or service

organization that does not come within the scope of General

Insurance. Risk is inherent aspect of human life whether individual or

organization. Without risks there cannot be progress. Occurrence of

uncertainty cannot be predicted. Insurance is one certain way of

dealing with uncertainties because risk arises out of uncertainty and

is a pervasive force in the world.

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History of Motor Insurance

Motor Insurance had its beginnings in the United Kingdom in the early

part of this century. The first motor car was introduced into England in

1894. The first motor policy was introduced in 1895 to cover third

party liabilities. By 1899, accidental damage to the car was added to

the policy, thus introducing, the comprehensive policy along the lines

of the policy today.

In 1903, the Car and General Insurance Corporation LTD was

established mainly to transact motor insurance, followed by other

companies. After World War 1, there was a considerable increase in

the number of vehicles on the road as also in the number of road

accidents. Many injured persons in road accidents were unable to

recover damages because not all motorists were insured. This led to

the introduction of compulsory third party insurance through the

passing of the Road Traffic Acts 1930 and 1934. The compulsory

insurance provisions of these acts have been consolidated by the

Road Traffic Acts 1960.

In India, the Motor Vehicles Act was passed in 1939 introducing the

law relating to compulsory third party insurance. The practice of

motor insurance in India generally follows that of the U.K. market.

The business is governed by a tariff, whereas in U.K. the tariffs have

been withdrawn. The Motor Vehicles Act 1988 has replaced the

earlier 1939 Act, and it became effective from 1st July 1989.

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Meaning

Motor Insurance is insurance where consumers can purchase for

cars, trucks and other vehicles. Its primary use is to provide

protection against losses incurred as a result of traffic and car

accidents. An insurance company may declare a vehicle totally

destroyed (‘totalled’ or ‘write-off’) if it appears replacement would be

cheaper than repair. It is a comprehensive policy that not only covers

you against third party but also against accidents, damage, injury and

much more.

Motor Insurance is a legal requirement if you want to drive your car

on public roads. However, this doesn’t mean there aren’t still ways to

save money, even if you don’t belong to one of the traditionally safe

group of drivers. The type of insurance you take out, along with the

type of driver you are, combining to provide the overall likelihood that

you will be able to get a cheap quote.

Compulsory Motor Insurance results in lowering the disposable

income or it results in a shift of income from lower group to the higher

group. If it is not made compulsory, there is a strong possibility that

some may not buy these voluntarily. This is because most of them

think that the cost of accidents or losses will fall on others or they

underestimate the risk of loss. Also, Compulsory insurance would

encourage people to drive safely which may reduce the cost of risk.

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Need for Motor Insurance

In Indian conditions the vehicles are subject to many hazards like

potholes, puddles, traffic management system, jaywalkers, increasing

number of accidents etc. which accentuate the need for automobile

insurance. Some of these hazards are discussed below:-

Footpaths : As footpaths are occupied by hawkers, pedestrians

have a tough time dodging between vehicles to reach the other

end of the road. Large potholes during monsoons can worsen

the situation causing damage to the vehicle.

Drunken Driving : It is another major reason for increase in

accidents, be it a car, two-wheeler or even a truck.

Reckless Driving : Majority of the youngsters drive recklessly

caring little for the law, causing serious accidents resulting in

loss of life or limb.

Fire: There is also a danger of fire or theft of vehicle Therefore,

motor insurance under such unsafe conditions is a must not

only to cover risks towards the owner and the vehicle but also

to cover the financial liability that may arise from an accident in

which the other party is injured or the cost of repairs that you

may have to pay to other party in case of an accident.

Theft: Cases of stolen cars on the rise. Experts in stealing cars

are well aware of the loopholes that can be exploited and

accordingly have been successful in manipulating with the

chases no. of vehicles in order that they are not traced.

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Principles of Motor Insurance

1. Principle of Utmost good faith: Contracts of motor insurance

are governed by the doctrine of “utmost good faith.” It is the

name of a legal doctrine which governs insurance contracts.

Under utmost good faith contracts if there is a violation it is

categorized as a material misrepresentation, a breach of a

warranty, or concealment. Some examples of material facts in

motor insurance are the type of vehicle, the geographical area

of use, the physical condition of the driver, the driving history of

the driver etc.

2. Principle of Contract of Indemnity: The principle of

indemnification is that the insured should not profit from the

policy. This does not preclude that the insured will suffer some

loss. In fact, many policies include a deductible which

guarantees that the insured will pay part of each loss himself. In

the event of total loss of the vehicle, insurers pay the market

value of the vehicle at the time of loss or the sum insured

whichever is less. If vehicle is damaged, the cost of repairs is

paid, but if old parts are replaced by new, a suitable

depreciation is charged on the cost of new parts.

3. Principle of Insurable Interest: Insurable Interest is one

wherein loss would be suffered from an adverse occurrence to

the person insured. In motor insurance, the vehicle is the

property which is exposed to loss or damage. The insured also

has a legal liability towards third parties; he may suffer financial

loss if he incurs that liability caused by negligent use of the

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vehicle. Therefore, the insured has insurable interest which

entitles him to insure the vehicle against damage and liability

risk. Motor policies are extended to indemnify persons other

than the insured in respect of third party liability. Although

owner insured has, no insurable interest in any such liability, he

is deemed as having acted as an agent in arranging the

indemnity on behalf of other persons who may drive the vehicle

and incur liability. Otherwise, the injured third parties will have

no recourse to recover damages.

4. Principle of subrogation: Subrogation is the transfer of the

rights from the insured to the insurer when the loss or damage

to the vehicle is caused by the negligence of another person.

Insurers exercise the right to cover the loss from the person

responsible. Subrogation operates only after the claim is paid.

5. Principle of contribution: It arises when there is double

insurance, that is, when the same vehicle is insured under two

policies. The contribution condition is specially worded in

private car policies because the owner is also covered for the

third party liability while driving cars not belonging to him.

6. Proximate Cause: In this, the loss or damage to the vehicle is

indemnified only if it is proximately caused by one of the

insured perils. The doctrine also applies to third party claims.

The third party injury or property damage must be proximately

caused by the negligence of the insured for which he is held

legally liable to pay damages.

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Classification of Motor Vehicles

For the purpose of insurance Motor Vehicles are classified into the

following categories:

1. Private Cars:

Vehicles used solely for social, domestic and pleasure

purposes.

Cars of private type including station wagons, used for

domestic, business and professional purposes of the

insured or used by the insured’s employees for such

purposes.

Three wheeled cars (including cabin scooters used for

private purposes)

2. Motor Cycles and Motor Scooters:

Mechanically propelled two wheelers with or without side

car.

Mechanically propelled three wheelers with engine

capacity.

3. Commercial Vehicles:

Goods carrying vehicles.

Passengers carrying Vehicles e.g. motorized rickshaws,

taxis, buses.

4. Miscellaneous and special types of Vehicles:

Agricultural tractors and fire tenders and salvage corps.

Hearses, ambulances, cranes, excavators

Cinema film recording and publicity vans

Garbage dumping trucks, road rollers etc.

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Types of Motor Insurance Available

1. Two Wheeler Insurance: Two wheeler insurance provides a

kind of personal accidental cover for owners, while driving

the vehicle. The policy generally provides protection from

any loss or damage to the vehicle arising out of natural

calamity like fire, injury, burglary etc. The amount insured will

depend on the current showroom price multiplied by the

depreciation rate fixed by the Tariff Advisory Committee at

the time of commencement of policy period. Fast and easy

claim process by most insurance companies will ensure

existing customer loyalty and widen the customer base.

2. Car Insurance: Car insurance is the fastest growing

segment in the auto insurance category. This is because

insuring car is mandatory for everyone buying a new car.

Car insurance includes loss or damage by accident, third

party insurance, insurance against burglary etc. The amount

of premium will depend on the make and value of the car,

state where the car is registered, year of manufacture etc.

3. Commercial Vehicle Insurance: This covers all vehicles

not used for personal purpose. Trucks and heavy motor

vehicles are covered under this insurance. This insurance

protects against damage caused due to accident, third party

injury etc. The premium amount depends on a number of

factors like showroom price of the vehicle at the

commencement of the insurance period.

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Motor Vehicle Act

In India the Motor Vehicles Act was first introduced in 1939 and later

it became effective from 1st July 1989. It introduced the law relating to

compulsory insurance of any motor vehicle that plies in public places.

Motor Vehicles Act states that every motor vehicle plying on the road

has to be insured, with at least Liability only policy. There are two

types of policy one covering the act of liability, while other covers

insurers all liability and damage caused to one’s vehicle. Since a

single policy cannot meet all the insurance objectives, one should

have a portfolio of policies covering all the needs.

Some of the provisions of the Act provide the following matters:

Rationalisation of certain definitions with addition of certain new

definitions of new types of vehicles.

Stricter procedures for grant of driving licences and period of

their validity

Laying down of standards for the components and parts of

motor vehicles.

Provisions for issuing fitness certificates of vehicles also by the

authorized testing stations.

Enabling provision for updating the system of registration

marks.

Maintenance of state registers for driving licenses and vehicle

registration and constitution of Road Safety Councils.

Standards for anti-pollution control devices.

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Seeking to provide for more deterrent punishment in cases of

certain offences.

Liberalized schemes for grant of All-India Tourist permits as

also national permits for goods carriages.

The liabilities that require to be covered under this Act are:

Any liability arising in respect of death or bodily injury to any

person including the owner of the vehicle or his authorized

person in the carriage.

Any liability incurred in respect of damage to any property of a

third party.

Any liability incurred in respect of the death or bodily injury of

any passenger of a public service vehicle.

Any liability arising under Workmen’s Compensation Act, in

respect of injury or death of:

A paid driver of the vehicle

Conductor or ticket examiner

Worker’s carries in a goods vehicle.

Any liability for bodily injury or death of passengers who are

carried for reward or hire by reason of a contract of

employment.

The policy should carry a ‘no fault’ liability limited to a sum of Rs

50,000 in case of death, Rs 25,000 in case of permanent

disability and Rs 6,000 in case of damage to property.

Laws and Regulations

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The classical scene on Indian roads is that of arrogant drivers

bullying over safe drivers. Trucks, buses, cars, two wheelers and

three wheelers all wedging in between other vehicles, try to race

ahead, at traffic signals and in between signals. With their hands on

the steering wheel, most drivers feel they own the roads. For these

drivers traffic rules are silly and kill the joy of driving a vehicle.

More than 35 million registered vehicles traffic a network of around 3

million kms of roads in India. The Indian roads see more than 3 lakh

road accidents that kill more than 65000 people and injure another 3

lakh. The most appalling fact is that, most accidents happen due to

sheer ignorance amongst drivers and vehicle owners of basic rules

for Indian roads. Therefore, better knowledge of rules and regulations

could help everyone on the roads.

The RTO office enforces the law on Indian roads, and the law that

governs the Indian roads are the following:

The Motor Vehicles Act (MVA) 1914/ 1939 AND 1988- The law for

operation for all Motor Vehicles in India.

The Central Motor Vehicles Rules (CMVR) 1994- Rules that

stipulate various procedures with reference to the MVA 1988.

The State Motor Vehicles Rules- Rules framed by various state

governments in accordance with the MVA and CMVR to suit local

conditions of the State.

Rules and Regulations in relation to Motor Insurance:

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Driving Licence (Section 14 Motor Vehicles Act):

An appropriate driving licence is required if you want to drive a motor

vehicle anywhere in India. A driver’s licence issued by the competent

authority of any state/union territory is valid throughout the Indian

Union. International Driving Permit (IDP) can be issued by any RTO

or motoring associations, like The Western India Automobile

Association, authorised by the Government. The period of validity is

one year. You must carry your driving licence on your person at all

times; a photocopy of the driving licence is not acceptable.

Registration, where to be made (Section 40 of Motor Vehicles

Act):

Subject to the provisions of section 42, section 43 and section 60,

every owner of a motor vehicle shall cause the vehicle to be

registered by a registering authority in whose jurisdiction he has the

residence or place of business where the vehicle is normally kept.

Registration, how to be made (Section 41 of Motor Vehicles Act)

An application by or on behalf of the owner of a motor vehicle

for registration shall be in such form and shall be accompanied

by such documents, particulars and information and shall be

made within such period as may be prescribed by the Central

Government.

The registering authoring shall issue to the owner of a motor

vehicle registered by it a certificate of registration in such form

and containing such particulars and information an in such

manner as may be prescribed by the Central Government.

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In addition to the other particulars required to be included in the

certificate of registration, it shall also specify the type of the

motor vehicle, having regard to the design construction and use

of it, by notification in the Official Gazette.

The registering authority shall enter the particulars of the

certificate in a register to be maintained in such form as may be

prescribed by the Central Government.

The registering authority shall assign to the vehicle, for display

thereon, a distinguishing mark referred to as the registration

mark followed by such letters and figures as allotted to the state

and displayed and shown on the motor vehicle in such form as

may be prescribed by the Central Government.

A certificate of registration in respect of a motor vehicle, other

than a transport vehicle, shall, subject to the provisions

contained in this Act, be valid only for a period of fifteen years

from the date of issue of such certificate and shall be

renewable.

Alteration in Motor Vehicle (Section 52 Motor Vehicles Act):

No vehicle can be altered to an extent that the particulars containing

in the registration certificate are no longer accurate. Before doing any

alterations, it is necessary to have permission of the concerned RTO.

After carrying out the alteration, the owner must forward the

registration certificate to the RTO within 14 days, for making

necessary corrections.

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Cancellation of registration (Section 55 of Motor Vehicles Act)

If a motor vehicle has been destroyed or has been rendered

permanently incapable of use, the owner shall, within fourteen

days or as soon as may be, report the fact to the registering

authority within those jurisdiction he has the residence or place

of business where the vehicle.

The registering authority shall, cancel the registration and the

certificate of registration, or, if it is not, shall forward the report

and the certificate of registration to the original registering

authority and that authority shall cancel the registration.

A registering authority cancelling the registration of a motor

vehicle under section 54 or under this section shall

communicate such fact in writing to the owner of the vehicle,

and the owner of the vehicle shall forthwith surrender to that

authority the certificate of registration of the vehicle.

The colour scheme for Non –Transport vehicles (Section 118

Motor Vehicles Act):

Permanent Registration- White on Black plate

Temporary Number- Red on Yellow Plate

Fancy lettering, raised or shining metal numbers are not

permitted. The plate should not have any line, or colour, or any

other kind of marking on it.

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Car Registration Mark (Rules 50, 51 Central Motor Vehicles):

The registration number displayed must confirm to following

specifications:

Letters: 4.5 cm high/1 cm thick

Numerals: 6 cm/ 1 cm thick

Space between letters/ numerals should not be less than 1 cm.

Lamps and additional lights (Rules 105-108,111 Central Motor

Vehicles Rules):

Spotlights, search lights, fancy lights, mercury lamps are

expressly forbidden.

Dome lights are not permitted unless specially authorised.

A reversing white light is permitted provided the light is diffused

and not too bright.

Rear View Mirror (Rule 125 Central Motor Vehicles Rules):

Every motor vehicle, except motor cycles, must be fitted with a rear

view mirror in such a way that the driver has a clear vision of the

traffic behind.

Horns (Rule 119 Central Motor Vehicles Rules):

No vehicle is allowed to be fitted with any multitone horn. Horns

producing musical notes, unduly harsh, loud, shrill or alarming noises

fall in this category.

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Tinted glasses (Rule 100 Central Motor Vehicles Rules):

Tinted glasses or sun control films should not be so dark as to

obscure clear vision.

Any material that reflects light is also not permitted. Use of

curtains that obscure clear vision is prohibited.

TV/Video/Music (Rule 162 Central Motor Vehicles Rules):

No TV/Video display should be placed in a vehicle in a manner that it

may distract the driver. The music played in the vehicle must be kept

at low levels of sound so as not to distract other drivers on the road.

Duty of driver in case of accident and injury to a person (Section

134 Motor Vehicles Act):

When any person is injured or any property of a third party is

damaged as a result of an accident in which a motor vehicle is

involved, the driver of the vehicle or other person in charge of

the vehicle shall-

Unless it is not practicable to do so on account of mob fury or

any other reason beyond his control, take all reasonable steps

to secure medical attention for the injured person, by conveying

him to the nearest medical practitioner or hospital immediately

unless the injured person or his guardian, in case he is a minor,

desires otherwise.

Give on demand by a police officer any information required by

him, or, if no police is present, report the circumstances of the

occurrence, if any, for not taking reasonable steps to secure

medical attention as required, at the nearest police station as

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soon as possible, and in any case within twenty four hours of

the occurrence.

Give the following information in writing to the insurer who has

issued the certificate of insurance, about the occurrence of the

incident namely:

Insurance Policy number and its period of validity.

Date, Time and Place of accident.

Particulars of the persons injured or killed in the accident.

Name of the driver and particulars of his driving license.

Necessity for insurance against third party risks: (Section 146

Motor Vehicles Act):

No person shall use, except as a passenger or cause or allow any

other person to use, a motor vehicle in a public place unless there is

in force a policy of insurance complying with the requirements of the

provisions of the Act. The legal requirement is of ‘third party’

insurance only. It is sensible to have a comprehensive policy that

covers- third party risk, damage/loss due to accident, fire or theft and

also covers risks against floods, earthquake, riots and strikes.

Also, in the case of a motor vehicle carrying or meant to carry

dangerous or hazardous goods there shall be policy of insurance

under the Public Liability Act 1991.

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Section 196: Driving under vehicle:

Whoever drives a motor vehicle or causes or allows a motor vehicle

to be driven in contravention of the provisions of Section 146 shall be

punishable with imprisonment which may extend to three months, or

with fine which may extend to Rs 1000 or both.

Transfer of certificate of insurance (Section 157 of Motor

Vehicles Act 1988):

Where a person in whose favour the certificate of insurance has been

issued, transfers to another person the ownership of the motor

vehicle, in respect of which such insurance was taken together with

the policy of insurance relating thereto, the certificate of insurance

and the policy described in the certificate shall be deemed to have

been transferred in favour of the person to whom the motor vehicle is

transferred with effect from the date of its transfer. The transferee

shall apply within fourteen days from the date of transfer in the

prescribed form to the insurer for making necessary changes in the

certificate and the policy of insurance in regard to the transfer of

insurance.

Hit and Run Motor Accidents:

Section 161 to 163 Motor Vehicles Act, 1988 describes the procedure

of the insurance payments in the case of Hit and Run Motor

Accidents. They are those accidents in which a member of the public

is hit by a motor vehicle not identifiable or traceable by reasonable

efforts of the claimants or the insurers. It defines the terms such as

grievously hurt, death by hit and run motor accident.

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Claims Tribunals (Section 165 of Motor Vehicles Act 1988):

A state Government may, by notification in the official Gazette,

constitute one or more Motor Accidents claims Tribunals for such

area as may be specified in the notification for the purpose of

adjudicating upon claims for compensation in respect of accidents

involving the death of, or bodily injury to, persons arising out of the

use of motor vehicles or damages to any property of a third party so

arising or both. A claims tribunal shall consist of such number of

members as the state government may think fit to appoint and where

it consists of two or more members, one of them shall be appointed

as the chairman thereof.

A person shall not be qualified for appointment as a member of a

Claims Tribunal unless he-

Is, or has been, a Judge of a High Court, or

Is, or has been a District Judge, or

Is qualified for appointment as a High Court Judge

Application for compensation (Section 166 of Motor Vehicles

Act):

An application for compensation arising out of an accident of the

nature specified in sub-section (1) of section 165 may be made-

By the person who has sustained the injury

By the owner of the property

Where death has resulted from the accident, by all or any of the

legal representatives of the deceased.

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Every application under sub-section (1) shall be made, at the option

of the claimant, either to the Claims Tribunal having jurisdiction over

the area in which the accident occurred, or to the Claims Tribunal

within the local limits of whose jurisdiction the claimant resides or

carries on business or within the local limits of whose jurisdiction the

defendant resides, and shall be in such form and contain such

particulars as may be prescribed: Provided that where no claim for

compensation under section 140 is made in such application, the

application shall contain a separate statement to that effect

immediately before the signature of the applicant.

Award of the Claims Tribunal (Section 168 of Motor Vehicles Act)

On receipt of an application for compensation made under section

166, the Claims Tribunal shall arrange to deliver copies of the award

to the parties concerned expeditiously and in any case within a period

of fifteen days from the date of the award. When an award is made

under this section, the person who is required to pay any amount in

terms of such award shall, within thirty days of the date of announcing

the award by the Claims Tribunal, deposit the entire amount awarded

in such manner as the Claims Tribunal may direct.

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Procedure and powers of Claims Tribunals (Section 169 of Motor

Vehicles Act):

The Claims tribunal shall have all the powers of a Civil Court for the

purpose of taking evidence on oath and of enforcing the attendance

of witnesses and of compelling the discovery and production of

documents and material objects and for such other purposes as may

be prescribed. Subject to any rules that may be made in this behalf,

the Claims Tribunal may for the purpose of adjudicating upon any

claim for compensation, choose one or more persons possessing

special knowledge of any matter relevant to the inquiry to assist it in

holding the inquiry.

Appeals (Section 173 of Motor Vehicles Act):

Subject to the provisions of sub-section (2) any person aggrieved by

an award of a Claims Tribunal may, within ninety days from the date

of the award prefer an appeal to the High Court: Provided that no

appeal by the person who is required to pay any amount in terms of

such award shall be entertained by the High Court unless he has

deposited with it twenty five thousand rupees or fifty percent, of the

amount so awarded, whichever is less, in the manner directed by the

High Court: Provided further that the High Court may entertain the

appeal after the expiry of the said period of ninety days, if it is

satisfied that the appellant was prevented by sufficient cause from

preferring the appeal in time. No appeal shall lie against any award of

a Claims Tribunal if the amount in dispute in the appeal is less than

ten thousand rupees.

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Using vehicle without registration (Section 192 Motor Vehicles

Act):

Whoever drives a motor vehicle or causes or allows a motor vehicle

to be used in contravention of the provisions of section 39 shall be

punishable for the first offence with a fine which may extend to five

thousand rupees but shall not be less than two thousand rupees for a

second or subsequent offence with imprisonment which may extend

to one year or with fine which may extend to ten thousand rupees but

shall not be less than five thousand rupees or with both. Nothing in

this section shall apply to the use of a motor vehicle in an emergency

for the conveyance o persons suffering from sickness or injuries.

Using vehicle without permit (Section 192A of Motor Vehicles

Act):

Whoever drives a motor vehicle or causes or allows a motor vehicle

to be used in contravention of the provisions of sub-section (1) of

section 66 or in contravention of any condition of a permit relating to

the route on which the vehicle may be used, shall be punishable for

the first offence with a fine which may extend to five thousand rupees

but shall not be less than two thousand rupees and for any

subsequent offence with imprisonment which may extend to one year

but shall not be less than three months or with fine which may extend

to ten thousand rupees but shall not be less than five thousand

rupees or with both.

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Types of Motor Insurance Policies

Legally, no motor vehicle is allowed to be driven on the road without

valid insurance. The All India Motor Tariff governs motor insurance

business in India. According to the tariff, all classes of vehicle use the

following types of motor insurance policies as issued under Car and

Two-Wheeler insurance.

Car Insurance:

Suitability: One should possess a valid “Liability Policy” to use a

motor vehicle in a public place, as it is made compulsory by the

provisions of Motor Vehicles Act 1988. In case a vehicle is purchased

under Hire Purchase agreement, the financiers insist upon a Package

Policy to take care of their interest as collateral security.

Salient features: Insurance companies issue Liability for “Act Risks”

and Package policy for Comprehensive Risks under the Motor

Vehicles Insurance.

Liability Policy: Liability policy covers risks required to be covered

under the Motor Vehicles Act. It is mandatory that every car owner be

covered against Act Risks under section 146 of Motor Vehicles Act

1988. The scope of cover is to pay compensation for death of or

bodily injuries to third parties and damage to the property of third

parties. While the insured is treated as the first party and the

Insurance Company second party, all others would be third parties.

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This policy provides personal accident cover of Rs 2, 00,000 to owner

driver. While the compensation for the personal injuries to third

parties is unlimited, property damage is limited to Rs 7, 50,000.

Package policy: This policy covers all the risks of liability policy as

well as the loss of or damage to insured’s vehicle, also the perils

covered are:

Damage to vehicle by accidental external means, fire, lightning,

explosion, self ignition, burglary

Riot and strike, malicious acts and terrorist acts

Earthquake

Flood, inundation, cyclone etc

Landslide/ rockslide

Package policy can be restricted to loss or damage due to fire or theft

or both. In case of liability policy + fire, the premium is only 25% of

own damage premium + liability premium. In case of liability only

policy + theft, the premium is only 30% of own damage premium +

liability premium and in case of liability only policy + fire and theft, the

premium is 50% of own damage premium + liability premium.

No claim discount: For every claim free year, the insured is rewarded

with discounts in premium up to an extent of 55%. In case of a claim

in any year, bonus earned till that year is wiped out.

Two Wheeler Insurance :

27

Suitability: All two wheeler owners should avail the Policy A or the

“Act Policy” as it is made compulsory by the provisions of Motor

Vehicles Act 1988. In case a vehicle is purchased under Hire

Purchase agreement, the financiers insist upon a Comprehensive

Policy to take care of their collateral security.

Salient features: Insurance companies issue policy A or “Act Policy”

and Policy B or the Comprehensive Policy under the Motor Vehicles

Insurance.

Policy A (“Act Policy”): Policy A covers risks required to be covered

under the Motor Vehicles Act. It is mandatory that every two wheeler

owner be covered against Act Risks under section 146 of Motor

Vehicles Act 1988. The scope of cover is to pay compensation for

death of or bodily injuries to third parties and damage to the property

of third parties. While the insured is treated as the first party and the

insurance company as second party, all others would be third parties.

As per requirements of the Motor Vehicles Act, while compensation

for personal injuries to third parties is unlimited, property damage is

limited to Rs 6,000 only. This limit can be enhanced on payment of

additional premium.

28

Policy B (Comprehensive Policy): For private cars and motor

cycles, there are two sections in the Comprehensive Policy.

Section 1 concerns loss or damage to the vehicle and covers the

risks, This policy covers all the risks of Policy A as well as the loss of

or damage to insured’s vehicle also, the perils covered are:

Damage to vehicle by fire, lightning, explosion

Riot & strike, malicious acts and terrorist acts

Earthquake

Flood, inundation, cyclone etc

Landslide/ rockslide while in transit by rail, road, air

Policy B can be restricted to loss or damage due to fire or theft or

both fire & theft in combination with policy A or without. In case of

“Act Policy”+ fire or theft, the premium is only 25% of own damage

premium+ Act premium. In case of Act + Fire & theft, the premium is

40% of own damage premium + Act premium. These extended

covers can be obtained without inclusion of “Act” risks, provided the

vehicle is not put to use.

The geographical limit for use of the vehicle is India, but the limits can

be extended to Nepal & Bhutan without extra premium and to

Bangladesh by charging an extra premium of Rs 50 for

comprehensive policy and Rs 10 for Act policies. Policies can be

issued for periods less than one year. Long term policies can be

issued for “Act” only risks.

Motor Tariffs

29

The Tariff Advisory Committee (T.A.C.) has aid down detailed rules,

regulations, rates, terms and conditions for transactions of motor

insurance in Indian accordance with the provisions of part 2 (B) of the

Insurance Act,1938. The Tariff supersedes the provisions of Indian

Motor Tariff in existence up to 30th June 2002. There is no motor

insurance in India which is non tariff. The Tariffs are administered by

the miscellaneous sub-committee of the four Regional Committees of

the T.A.C. in Bombay, Calcutta, Madras and Delhi.

Indian Motor Tariff: The Indian Motor Tariff has laid out certain

general regulations that are to be followed by the insurer and the

insured to constitute a valid contract. The regulations provide that the

motor insurance in India cannot be transacted outside the purview of

the Indian Motor Tariff unless specifically authorized by the Tariff

Advisory Committee. Some of the important General Regulations

under Indian Motor Tariff are as follows:

GR-9: Depreciation on parts for partial loss claims:

The following rates of depreciation shall apply for replacement of

parts for partial loss claims in respect of all categories of vehicles.

Rate of depreciation for all rubber nylon/plastic parts tyres and

tubes, batteries is 50%

Rate of depreciation for all parts made of glass is nil

Rate of depreciation for all other parts like wooden parts

depends upon the age of car.

GR-12: Premium rates for short period cover:

30

Policies issued or renewed for periods shorter than 12 months will

attract short period rates which must also be applied in calculating the

premium when policies are cancelled.

GR-17: Transfer of rights to the legal heir in case of death of

insured owner of vehicle:

The existing Motor Tariff do not provide for automatic transfer of the

rights to the legal heir in case of death of insured owner of vehicle. In

order to facilitate the smooth transfer of the rights to the legal heir, it

was decided at the Tariff Advisory Committee meeting held to

incorporate the following provisions as a part of policy conditions.

In the event of death of the sole insured, this policy will not

immediately lapse but will remain valid for a period of three months

from the date of the death of the insured or until the expiry of this

policy (whichever is earlier). During the said period legal heirs of the

insured to whom the custody and use of the motor vehicle passes

may apply to have this policy transferred to his/her/their names or

obtain a new insurance policy for the motor vehicle.

Where such legal heirs wish to apply for a transfer of this policy or

obtain a new policy for the Motor Vehicle he/she/they should make an

application as per his/her/their requirements within the aforesaid

period to the company.

All such applications should be accompanied by:

Death certificate in relation to the insured

31

Proof of title to the motor vehicle

Copy of this policy

GR-20: Vehicles subject to Lease Agreement:

It is not permissible to issue policies in the joint name of Lessee and

Lessor. Policies must be issued in the name of Lessee and Lessor’s

interest protected by the use of specified endorsement.

GR-21: Vehicles subject to Hypothecation Agreement:

It is not permissible to issue policies in the joint name of register

owner of the vehicle. Policies must be issued in the name of register

owner of the vehicle protected by the use of specified endorsement.

GR-22: Cover Note:

Cover Note insuring motor vehicles are to be issued only in form 52 in

terms of rule 142 sub rule (1) of the Central Motor Vehicles Rules

1989 and as per section 6 of the India Motor Tariff. A cover note shall

be valid for a period of 60 days from the date of its issue and the

insurer shall issue a policy of the insurance before the date of expiry

of the cover note.

GR-23: Certificate of Insurance:

32

It is issued by the insurers in relation to every vehicle is the only

evidence acceptable to the police authorities to show that valid

insurance exists. This document has to be produced when demanded

by an authorized police officer. It cannot be backdated. Hence, if a

policy is not renewed on or before the expiry date, the certificate of

insurance in respect of new insurance will be effective only from the

date of new insurance.

GR-24: Cancellation of Insurance and Double Insurance:

Cancellation of Insurance: A policy can be cancelled only after

ensuring that the vehicle is insured elsewhere and the original

certificate of insurance is surrendered. If no claim has bee reported or

made, a pro-rata refund subject to minimum premium being retained,

can be made if the vehicle has been insured continuously for at least

12 months preceding the date of cancellation under a policy in the

name of the policyholder.

If the policy has been in force for less than a year, the refund should

be on short period basis subject to minimum premium being retained.

If a claim is made or reported, no refund of premium should be

allowed. It is important that the insurer should inform the R.T.O by

registered post about the cancellation of insurance. In every case

when policies are cancelled at insured’s request to take advantage of

pending rate changes, refund of premium must be calculated on short

period basis.

33

Double Insurance: In case of Double Insurance, on cancellation of

one of the policies by either of the parties, refund should be granted

on pro-rata basis and not on short basis for period both the policies

are in force concurrently.

GR-25: Cancellation and issuance of fresh certificate of

insurance:

Whether any alteration is made in the policy affecting the information

shown on the certificate of insurance, then it must be returned to the

insurance company by the insured for cancellation and a new

certificate must be issued. When a policy is cancelled by the insurer,

the insurer should, within seven days, notify such cancellation to the

registering authority concerned.

GR-34: Registration, use and insurance:

It is not permissible to insure any vehicle used for a purpose other

than that permitted by RTA concerned and also to insure any vehicle

in the name of an insured not conforming to the name recorded as

owner of the vehicle in the vehicle registration document excepting:

In case of temporary substitution

In respect of Motor Trade Risk

34

Documents

Proposal Forms: In Motor Insurance contract the proposal form is

used as a rule, it constitutes the means of communicating the offer to

the insurers or for making proposal for motor insurance. It is so

desired as to elicit all information necessary for a proper evaluation of

the risk and for rating. The questions commonly asked are:

Particulars about the proposed: Name, Address and

Occupation

Details of the vehicle to be insured: Registration letters and

numbers make of the vehicle, date of purchase and price paid

etc.

Details of other vehicles owned by the proposer and details of

the accidents during the past 3 to 5 years

Details of insurance history

Certificate of Insurance: This is a document evidencing that a motor

vehicle is insured against third party liability as required under the

Act. Certain features which appear in the certificate are:

Certificate number

Registration mark and number or description of the vehicle

insured

Effective date for commencement of insurance

Date of expiry of insurance

35

Limitations of use

Persons or classes of persons entitled to drive

Cover Note: It is usually issued when the policy and certificate of

insurance cannot be immediately issued for any reason. It has to be

issued in a prescribed form and is valid for a period of 15 days.

Policy Forms: Policy forms like proposal forms vary within wide limits

as between different classes of insurance, but they have certain

features in common. The policy is not the contract itself, but the

evidence of the contract. As soon as the policy is issued, the cover

note is cancelled.

Endorsements: It is a document which incorporates change in the

terms of the policy. It may be issued at the time of issuing the policy

to provide additional benefits and covers or to impose restrictions.

Renewal Notice: It is the practice of companies to issue renewal

notice to the insured usually one month in advance of the date of

expiry of the policy.

Renewal Receipt: This is a simpler document than the policy. It is

worded to the effect that in consideration of receipt of renewal

premium, the policy is renewed for a further period of 12 months

36

Underwriting

Motor Insurance business in India id generally considered to be an

unprofitable class of business. It is therefore essential to adopt a

sound underwriting policy which involves not only careful selection of

risks and imposition of appropriate terms and conditions. The main

factors taken into consideration for underwriting are as follows:

The type of Vehicle: The underwriting approach differs according to

the type of vehicle. The heavier vehicles are more exposed to

accidents since the resultant damages they incur are more. Similarly,

vehicles with higher carrying capacity expose more passengers to

risk. Therefore heavier vehicles attract higher premium rate. In private

cars, taxis and motor cycles the more the cubic capacity, the higher is

the premium rate.

The value of the vehicle: The premium rate is applied on the value

of the vehicle to arrive at the premium payable. It is the owner who

has to select a correct value of the vehicle and declare the same for

insurance. This value is known as the Insured’s Estimated Value

(IEV). In motor insurance, the IEV is the limit of liability per accident

and not for the entire period of insurance.

Normally, this value is arrived at by considering the age of the vehicle

and its present purchase price. It is not worthwhile to insure your

vehicle at a higher value since that will increase the premium payable

but, in case of total loss, only the market value would be payable.

37

It is very important to select a correct IEV for insurance. There is a

tendency of motor vehicle owners to declare a lower value for

insurance to reduce the premium expenditure. Although, insurance

companies check the IEV for its sufficiency before accepting the

insurance, this is not a correct practice as the insured is exposed to a

greater loss in case the vehicle is totally lost or damaged.

The Use of the Vehicle: Risk exposure varies in relation to the use

of the vehicle. For e.g. taxis attract a higher premium rate whereas

goods carrying vehicles, which are used as private carriers and

transport, attract a lower premium rate.

The Geographical area of operation: The area of operation of a

vehicle has a direct bearing on the premium rate. This is so because,

certain areas are more congested with high densities of population

and road traffic than others and poses higher exposure to accidents.

For this purpose, the tariff differentiates two zones in India, i.e. Zone

A and Zone B, for private cars and taxis.

Zone A represents the Madras region and Bombay region (excluding

Bombay city) and Zone B represents the Calcutta region, Delhi region

and Bombay city. In Zone B, the densities of population and road

traffic are more and hence attract a higher premium rate. Such

differential rating does not apply to commercial vehicles such as

trucks and buses, as these vehicles normally travel throughout India

for their operation.

38

Driver of the vehicle: The personal hazard of the driver is a crucial

factor in the underwriting system. The hazard arising from the driver

can be assessed from the point of view of his age, physical health,

occupation and driving experience. Age has a material bearing on the

risk. The young driver presents an unfavourable hazard because

speed has special attraction for youth. Some insurance companies

may also consider the sex and marital status of the driver.

There is evidence that a female driver may present a better risk than

a male and that a married person with possibly a family is a better

risk than a single person. The driving experience may indicate

accident proneness. It is found that numerous claims occur with new

drivers because of their limited driving experience. Another great

menace on the road is the experienced driver who is reckless and will

take risks which the new motorist would never do.

The claims experience: Unfavourable claims experience is

obviously a bad risk. The tariff has adopted a system called the

Bonus/Malus Clause, to give discounts for good claims experience

and a loading for bad experience.

The system of Bonus/Malus recognizes the above factor indirectly

since bonus is a reward which allows discounts for claim free period,

while Malus is a loading in the premium for adverse claims. The

minimum bonus is 20% and maximum is 65% whereas minimum

Malus is 10% and maximum is 50%.

39

Claims

Motor Insurance business in India is generally considered to be an

unprofitable class of business. In recent years, the claims under

motor insurance have shown signs of deterioration. With the increase

in the number of vehicles and traffic density, higher costs of labour

and spare parts and escalating awards for third party claims, control

of claims cost is imperative.

The Insurance Companies in India are therefore required to pay the

compensation amount to accident victim or the family members within

90 days. If the insurance company fails to do so, then the Motor

Accident Claims Tribunals (MACT) must impose a penalty of Rs

5,000 on such companies for the delay. If after 90 days the insurance

company fails to pay the amount it shall be the duty of the banker to

deposit the cheque drawn in the name of claimant with the MACT in

one week of 90 days expiry period.

Most of the people perceive that procedure involved in claiming

insurance is not too complicated and cumbersome. Smaller claims

are processed within a period of two weeks but larger claims involve

more procedures at the insurance company’s office and thus take

longer time.

40

Settlement of claims under Motor Insurance

For settlement of insurance claim under motor vehicle insurance the

following claims usually occur in the following ways:

Claims for Own Damage:

On receipt of notice of loss, the policy records are checked to see

that the policy is in force and that it covers the vehicle involved. The

loss is entered in the claim register and a claim form is issued to the

insured for completion and return. The insured is also requested to

submit a detailed estimate of repair charges.

Assessment of Survey Report: Independent Automobile

Surveyors are assigned the task of assessing the cause and

extent of loss. They inspect the damaged vehicle. And submit

their report along with the copy of the policy, claim form and

estimate cost of repairs.

Claims Documents: The other documents required for

processing the claim are:

Driving Licence

Registration of Certificate book

Fitness Certificate

Police Report

Financial Bill

Satisfaction Note from the insured

Receipted Bill from the repairer if paid by insured

41

Settlement of Claim: On the basis of survey report and claim

documents the insurance company determines the extent of its

liability and the loss is indemnified. The insurance company

may get the vehicle repaired instead of making cash payment

to the insured in case of damage of motor vehicle.

Claims for Theft or Total Loss Claims:

Total losses can also arise due to theft of the vehicle and its

remaining untraced by the police authorities till the end. These losses

have to be supported by a copy of the First Information Report (FIR)

lodged with police immediately after the theft has been detected. If

the police authorities do not succeed in recovering the vehicle for

theft claims, the insurer is requested to submit the certificate of side

No. or CR No. Certification of true and undetected R.C. books and

taxation certificate of vehicle along with documents related to vehicles

and insurers. On the basis of investigation or inspection with valid

documents the insurance company determines the total loss or theft.

Claims for Third Party:

On the receipt of notice of claim from the insured, or the third party or

from Motor Accident Claims Tribunal, the matter is entrusted to an

advocate. The insured is requested to submit full information relating

to accident along with the following documents:

Driving licence

Police Report

Details of Driver’s prosecution

Death certificate

42

Medical certificate

Details of age, income, no of dependents etc.

On the basis of the written statements the matter is then filed with

Motor Accident Claims Tribunals by the Advocate, the MACT

determines the amount of claims to the third party.

A claim is not honoured under the following circumstances:

Any accident outside the geographical boundary of India

Any accident when the vehicle is driven by a driver without a

valid license.

Person driving under the influence of liquor or drugs

Wear and Tear: Consequential loss, depreciation, mechanical

or electrical breakdown, failure or breakages.

War and allied perils

Carrying of persons or goods more than the permitted capacity

by R.T.O

Current Scenario

43

Now, ensure an ambulance cover with car insurance:

Motorists insuring their vehicles can now be assured of a private

ambulance to transport them to hospitals in case of an accident. The

Western Indian Automobile Association (WIAA) has launched a motor

policy that goes beyond insuring the vehicle.

The ‘AA’ policy is the first one to be provided by an automobile

association. WIAA has tied up with Japan based IFFCO-Tokyo

General Insurance Company to provide the insurance cover. A victim

covered under the policy will be provided with an ambulance that will

transport the person to the nearest hospital in the shortest possible

time. Five centres have been set up across the city to handle

accident cases reported within the city limits. Later this service will be

extended outside the city.

Under the policy, special towing vans will be used to carry vehicles

that have been damaged. The towing vans will ensure that vehicles,

especially imported cars, are transported to safety without much

damage. According to Mr.Kedia, director-marketing of IFFCO-Tokyo

the biggest challenge is timely adequate claim settlement since the

biggest problem with insurance is the delay in getting claims.

44

Get ready for roadside service from motor insurers:

Insurance Companies will soon be able to offer value added services

such as roadside assistance to motor policyholders. Spain’s Mapfre

Group, which provides infrastructure support to insurers providing

motor assist programmes world wide is setting up shop in India.

Mapfre is seeing a big opportunity in India after insurers get complete

freedom to design insurance policies from April, 09. At present,

insurers cannot provide wider than the standard motor insurance

cover although they are free to set prices.

At present, Mapfre Asistencia is present in the country in the form of

a fully owned subsidiary- India Assistance. India Assistance will

launch itself roadside assistance services, under which they will

provide services for any kind of breakdown or accident. Customers

need to dial the call centre numbers and report the problem, following

which a suitable vendor will be notified and sent to the spot, to either

fix or to tow the car away. In serious problem, the company will even

provide the customer with a replacement car.

India Assistance aims to tie up with more than 3,000 service

providers for its roadside assistant services. The company will offer

these services to insurers, who have the option of coupling it with

their motor-insurance products as a value, add. The services will also

be offered to other corporates who wish to offer it to their employees

as well as automobile companies.

45

Case Studies

Changing Trends in Commercial Vehicles Insurance in India:

Swami Dorai, the owner of a transport company was giving

instructions to one of his truck drivers in the wake of new guidelines

for insuring commercial vehicles.

"Drive carefully, complete this trip without any major repairs," he said.

His truck driver asked him the reason for the emphasis on repairs.

"Following a burgeoning loss ratio, the state-run general insurance

companies are no longer going to provide comprehensive insurance

cover to commercial vehicles (CVs) over seven years old," replied

Dorai.

Insurance companies issued a circular directing branch and divisional

offices to stop accepting comprehensive insurance policies for

vehicles over seven years old from 2002. According to the circular,

commercial vehicles over seven years old will be insured only for

third-party liability. Comprehensive insurance policy covers third-party

liability as well as damages suffered to vehicles. The insurance cost

for motor vehicles was perceived to be too high. Dorai went to meet

Krishna Reddy, the divisional manager of National Insurance

Company which had insured all his vehicles, to talk about the issue.

“Although the company has not stopped insuring old commercial

vehicles, it has changed the mode of accepting premiums. These will

henceforth be accepted only at liability,” said Reddy. Comprehensive

cover is being discouraged. However the decision to provide

comprehensive cover has been left to the discretion of field officers.

46

The objective of regulation has been to make insurance available to

all motor vehicle operators. Though Mr Dorai possesses old vehicles,

the vehicles are in good shape and the insurer is benefiting as his

claims are less than what he pays as premium, thus he asked Reddy

to increase the premium amount. Reddy then told Dorai that taxies

carry more passengers than prescribed. In case of accidents causing

death or injury, the insurance companies have to bear the liability of

all the passengers, even if there are more than the numbers

prescribed.

Thus the insurers make huge losses as the claims exceed the

amount collected through premiums. This is one reason why

insurance companies are discouraging third party cover and have

curtailed commission to agents. The other reason is that the insurers

have detected fraudulent transactions while claiming damages.

Solution:-The insurers should not to provide insurance for commercial

vehicles as the claims ratio in the motor vehicle insurance category

has been consistently high in the past. It is necessary to develop

fleet safety programs (by transporters).

47

IRDA and the Changing Tariff Structure for Motor Vehicle Insurance in India:

What happened to the new tariff structure proposal by the Insurance

Regulatory and Development Authority of India (IRDA)?" asked

Charles De Cunha, owner of a transport service. "It's been deferred

for the moment," said Rao, friend of De Cunha. De Cunha's company

rents vehicles like cars, jeeps, luxury buses and other commercial

vehicles. The travel agency is located in Chennai, India. De Cunha

recently discovered that IRDA was planning drastic changes in the

proposed tariff structure for automobile insurance.

"Why has it been deferred?" asked De Cunha. "The IRDA has

postponed it temporarily to bring in some more refinements," replied

Rao. "Are you sure that the new proposal is going to come through?"

asked De Cunha.

"I hope so," said Rao. He added that N.Rangachary, the Chairman,

had revealed that IRDA was likely to announce the rationalized tariff

structure for motor vehicles insurance by the middle of May. "Do you

know anything more about the new tariff structure?" asked De Cunha.

"Yes, the new tariff structure has been evolved by the Ansari

Committee. It was actually supposed to be effective from April 1, but

in order to bring in more refinements, IRDA postponed it," said Rao.

“Is there any modification in the structure evolved by the Ansari

Committee?” asked De Cunha. “To my knowledge, there are three

major modifications made to the Ansari Committee’s

recommendations,”replied Rao.

48

According to Rao, the modifications are:

The rates of depreciation that the insurance companies will be

allowed to deduct from the ‘Insured’s declared value’ have been

raised.

There are plans to reduce the country into two zones

Concession in the premium for vehicles with anti-theft devices

Dividing the country into two zones will be beneficial. Chennai and

New Delhi are in top zone and as of now the tariff structure will be

high if the country is divided into four zones. But by reducing it to two

zones, the tariff rate will be reduced for both Chennai and New Delhi.

Solution:-IRDA is close to notifying the IRDA Regulations, 2002.

These regulations deal with the disclosures that are to be made at the

point of sale. In addition to this, the regulations stipulate the time limit

within which the insurance companies must act under various

circumstances. For instance, insurance companies have to furnish a

copy of the insurance proposal form to the insured within 30 days of

acceptance of the proposal. Queries too have to be raised at once

within a period of 15 days.

49

Issues and Challenges

The Motor Insurance industry in India has been in existence for a

long time. The market, like other insurance markets in India, has

been detariffed and thus different players can come up with different

products and not be bound by the tariff rules laid down by the Tariff

Advisory Committee (TAC)

Motor Insurance in India in some sense has been similar as

anywhere else in the world- there have been different kinds of

products but mainly the protection is towards any damage suffered by

the insured. This means that the insured could claim damages from

the insurance company against the costs for damages caused due to

an accident. Further, the insurance company also provided incentives

to the insured in terms of “No Claims Discount” i.e. if there was no

claim made in a particular year; the insured would get a discount on

the premium of the next year subject to a maximum discount

possible. All these are in line, at least, with the automobile insurance

policies in force in a number of developed markets.

However, there have been differences in the way these policies have

been implemented in India. These issues have been existent for a

long time but never came to the fore in the days of the tariff regime

and government controlled insurance market. But with about a

decade of liberalization of the insurance sector in India and the

detariffication of the market in recent times, some of these issues

50

have become really relevant and needs to be looked at with greater

scrutiny. Some of the major issues are as follows:

The age of the driver and the age of the driving license have no

relation to the premium amount:

The likelihood of an accident due to speeding is linked to two main

factors:

Age of the driver

Age of the driving License

It has been observed that younger drivers are more prone to

speeding and thus have a higher probability of being involved in high

speed crashes and accidents leading to huge claims on the insurance

policies. Very old drivers have been observed to have high probability

in being involved in accidents due to their slowness in reflexes or

other medical conditions.

Internationally, mainly in the developed world, these conditions are

considered while pricing the motor insurance policies. This implies

that young and new as well as old drivers pay more in terms of

premiums on their motor insurance policies as compared to middle-

aged drivers with a relatively old driving licence. This kind of

movement on the premium values is needed to ensure that the

insurance company is well covered in terms of the risks it faces by

selling the insurance policies.

51

However, Indian markets observe none of these. In fact, the

insurance premium is dependant not on the age or the experience of

the driver but on the age of the policy in question. This is not

necessarily the best strategy, especially from the perspective of the

middle-aged experienced driver who should see a reduction in the

premium cost but in effect sees no different from someone such

younger and inexperienced. Similarly, the insurance company is not

compensated for the additional risks it takes by insuring old drivers as

the premium charged cannot be modified to take care of such issues.

The type of the car has no relation to the premium charged:

This is another major issue that needs to be tackled by the motor

insurance industry in India. It is a fact that the premium on the car is

dependent on the size of the engine of the car, but then it has to be

realized that other factors also need to be taken into consideration

while determining the premium value for the insurance. For instance,

let’s assume that there are two cars with the same engine size. But

let one car be a sedate family car while the other is a sports car.

Obviously, the premium of the sport car should be more- that is

because the likelihood of a sports car speeding and therefore being

caught in an accident is higher than that of the family car. Such

issues or factors need to be considered by the insurers while

formulating the policies and deciding on the level of premium

associated with the policies.

52

This is something that is yet to be done in a large way in India. One

standard reason why it is not so prevalent is the fact that there are

very few sports cars in Indian markets, as compared to the motor

market in any developed country.

The “No Claims Discount” policy in effect lands up subsidizing

the “Bad Drivers” at the cost of the “Good Drivers”:

All automobile insurance policies in India, as in any other part of the

world have “No Claims Discount” system built into them. This is

effectively used as a means of rewarding “Good Drivers” for the fact

that they have been good drivers and not caused any accidents

which has resulted in claims to be settled by the insurer. There have

been a large number of studies that have been carried out on the

need of such schemes as well as the efficacy of such schemes.

While such schemes are useful for both the insurer (over a period of

time, the amount paid out as premium decreases) and the insured

(has better information about the insurer and hence can plan better),

it has often been seen that the schemes are not appropriately

designed. What this results in is the fact that the better drivers end up

in subsidizing the not so good drivers.

An effective “No claims Discount” scheme should not have such

biases and insurance companies should look at their portfolio and try

and ensure that such biases do not remain.

53

A point that needs to be made here is the fact that such biases would

be removed with the availability of better information about the driving

habits and patterns of the insured population. This is an issue in India

as the information that is available to the insurers is only based on

the information reaching them when a claim is made. In large number

of cases, the policyholders do not make a claim because the no

claims benefit exceeds the cost of repair and thus makes sense to

get it repaired without making a repair.

The “Claims settlement” process is really not completely geared

up to meet all kinds of challenges:

This has been the single largest issue in the automobile insurance

sector in India for a large number of years. The basic problem is the

authenticity of the claim made and the time taken to settle the same

by the insurance company. While insurance companies have made

significant strides towards the timeliness of the disbursement of the

accepted claims and in large number of cases there are cashless

claim settlement processes which are in place but all these work on

the premise that the claims are accepted as genuine by the insurer.

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Conclusion

Motor Vehicle Insurance falls under General Insurance. Its

importance is increasing day by day. In Motor Insurance the owner’s

liability to compensate people who are killed or injured through the

negligence of the motorists or drivers is passed on to the insurance

company. Motor Insurance business is the largest single section of

accident insurance, if judged by premium income, but this relates to

motor business as a whole.

Insurance growth has been galloping in the recent years. The

insurance industry in particular has been subjected to numerous

changes in the last few decades since the need for insurance is more

evident now than earlier. People’s spending patterns are changing

and more and more resources are needed for immediate

consumption. In early 1990s, the joint family system had provided

protection in case any unfortunate incidents were to occur to any

individual of the family, but after the advent of industrialization, the

joint families have split into single nuclear families.

Thus, insurance has become the most reliable tool an individual can

use to plan for his future.

Motor insurance today constitutes 60% of the portfolio for most of the

general insurance companies in the world. The trend would be the

same in India also. In 5 years, the motor insurance is slated to

increase from Rs. 8,000 crores to Rs. 20,000 crores. Currently, it is

41 % of the total general insurance business up from 36% five years

back.

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The automobile insurance industry has certain issues to face up to

resolve. That will ensure the fact that it shall be more efficient and

geared up in tune with the growth in the automobile industry in India.

Some of the issues are due to legacies that the insurers carry, some

are due to certain mindset issues that both the insurers and insured

have on certain issues which are due to data-related factors.

Whatever may be the issue, one has to look at possible ways to

address them, learn from markets that have addressed them

successfully. This will make the industry stronger and more resilient.

The current state of motor insurance as prevailing today can at best

be summarised as below -

Insurance has become the important driver for dealer

profitability and customer satisfaction.

Motor insurance especially private cars, is an area which all

insurers want to develop.

Continuous increase in cost and charges for labour & parts and

higher awards for third party claims are pushing the claims ratio

up.

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Bibliography

Reference Books:

Motor Insurance by V.B.Kolhatkar

Insurance by P.K.Gupta

Insurance by Julia Holyoake

Principles and practice of Insurance by Dr. P.Periasamy

Newspapers:

Economic Times

Your Money

DNA Money

Search sites:

www.autoinsurance.com

www.irda.org

www.insuremust.com

Search engines:

www.wikipedia.com

www.google.com

www.indianinfoline.com

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