Insurance regulator, IRDAI has said that it will withdraw its long-term motor vehicle insurance packages for three years for 4-wheelers, and five years for two-wheelers from August 1, 2020. The mentioned comprehensive insurance package includes 3-year Third Party (TP) & Own Damage (OD) Policy for 4-wheelers & 5-year TP & OD Policy for 2-wheelers.
The Supreme Court in August 2018 had directed making long-term Motor TP policy mandatory for vehicles. Long term meant a 5-year Motor Third Party policy for 2-wheelers and 3-year Motor Third Party policy for 4-wheelers.
Following the Supreme Court’s order, IRDAI issued a directive according to which Long Term Motor TP rules would be applicable to vehicles bought after September 1, 2018.
As per IRDAI’s directive, general insurers could only sell two kinds of motor policies- the first one would be a long term package cover which would have a 3-year TP & 3-year OD cover For For 4-Wheelers and 5-year TP and 5-year OD cover for 2-Wheelers. The second kind of product would be a bundled product that would have 3-year TP & 1-year OD policy For 4-wheelers & 5-year TP & 1-year OD policy for 2-wheelers.
With IRDAI’s latest order, the insurance regulator has withdrawn the first kind of product i.e long term package cover which would have a 3-year TP & 3-year OD cover For For 4-Wheelers & 5-year TP & 5-year OD cover for 2-Wheelers.
It's important to understand that long term motor TP policies will continue to remain mandatory and upfront premium payment will have to be made for five and three years respectively for 2-wheelers and 4-wheelers but insurers will only be able to sell the long term policies in bundle firm i.e a product which would have 3-year TP & 1-year OD policy For For 4-wheelers & 5-year TP & 1-year OD Policy for 2-wheelers.
Impact on insurance companies:
Experts believe that the withdrawal of long term package cover won’t impact insurers significantly. The long term motor policy is only applicable on about 40 percent of industry’s portfolio i.e vehicles bought after September 1, 2018, and out of these only 10-15 percent of policyholders opted for long term package cover whereas 85-90 percent opted for the bundle product which is a trend they would have expected to see going forward as well. Hence, the major section of policyholder anyway opted for bundled long term motor products will continue to sell.
As far as financials for insurers are concerned, even though policyholders were making an upfront payment, insurers could only show 1/5 of it as premium received for 2-wheelers and 1/3 of it as premium received for 4-wheelers every year and the balance could only be used as investible capital. It's because of this reason that impact on financials would be negligible which would only come on the investible capital.Impact on policyholders
Industry experts believe that the withdrawal of long term package cover also would have much impact on policyholders as they anyway preferred buying the bundled long term cover only due to cost advantage.