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Why Your Auto Insurance Premium Adjustments Each Yr – CNBCTV18

Choosing the right car insurance is just as important as choosing a car. However, choosing a policy is not an easy one. This can be quite a challenge as there are so many options available today at different prices and with different levels of damage coverage.

While many car owners choose the cheapest insurance plan, they often do so due to a lack of knowledge about the insurance components. One component that often puzzles customers is the changing premium tariff. Therefore, understanding the various components of car insurance premium and the various factors that affect its prices is crucial.

Let's take a look at why car insurance premiums change annually and how to make smart choices when you renew your insurance:

Components of the motor vehicle insurance premium

Under the Motor Vehicles Act of 1988, car owners are required to purchase “mandatory” insurance for their car to ensure compensation for death, personal injury and / or property damage to third parties caused by traffic accidents. This compulsory component is known as Liability Insurance (TP) and the premium for it is set in full by the IRDAI and is updated periodically every fiscal year.

However, given the scope of liability insurance (limited to liability insurance), car owners need additional insurance coverage to protect themselves financially against possible damage. Such coverage is known as Own Damage (OD) coverage and is offered by insurance companies to offset liabilities resulting from damage to the customer's own vehicle or to critical components such as the engine in situations such as a flood.

Both components together make up the majority of the insurance premium, with a small amount being contributed by the cost of add-ons, which may include personal accident insurance and various statutory liability insurances for the owner's driver, named and unnamed passengers, etc.

Factors influencing the cost of various components

IRDAI corrects the applicable premium for privately registered cars based on the cubic capacity (cm³) of the engine installed in it. Cars with engines below 1000 cc enjoy the lowest premium, while cars with engines over 1500 cc receive the highest third-party premium, which is more than three times that of the former.

Commercial vehicles have a slightly different tariff structure in the sense that the third-party bonus is determined by the passenger capacity of the vehicle or the engine capacity, whichever is higher. However, the new generation of electric vehicles (EVs) enjoy a much lower third-party premium. This is due to the IRDAI's incentive program. Lower third-party awards are one way to motivate car owners to choose a green vehicle and encourage other buyers to choose electric vehicles over fuel-powered cars in order to reduce their carbon footprint.

The self-damage premium, on the other hand, is determined by a number of factors, including the age of the vehicle, which in turn determines the insured value (IDV), the displacement of the vehicle, the geographic location and the additional insurance cover chosen by the customer.

Supplementary insurances such as engine protection, key protection, fuel counterfeit protection, tire and rim protection, zero depreciation protection and return-to-invoice (RTI) protection are among the most popular offers from most insurance companies. These add-ons have different prices based on factors such as the risks specific to the vehicle model.

In addition, the previous claims history of the car owner also plays an important role in the insurance premium. In the event of a zero accident in the previous insurance period, a car owner is entitled to a No Claim Bonus (NCB) of up to 50 percent of the personal damage premium. This will help to give a discount on the insurance premium and thus further reduce it.

The change in car insurance premium is determined by these several factors. It is therefore important to know and choose wisely the pricing details of your next auto insurance policy in order to enjoy stress-free driving.

The author, Rakesh Jain, is CEO at Reliance General Insurance Co. Ltd. The views expressed are personal

(Edited by: Anshul)

First published: December 31, 2021 at 8:24 a.m. IST

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