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Why your car insurance premium changes every year

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Let us look at why car insurance premium rates change annually and how can one make a smart choice at the time of insurance renewal:

Why your car insurance premium changes every year
Selecting a right car insurance policy is as important as selecting a car. Deciding on a policy is not easy though. It can pose quite a challenge as there are a wide range of options available today at varying prices and with different extent of damage coverage.
While many car-owners sway towards choosing the most affordable insurance plan, they often do so due to the lack of knowledge about policy components. One of such components that frequently puzzle customers is the changing premium rate. It is therefore crucial to understand the different components that constitute car insurance premium and the various factors that influence their prices.
Let us look at why car insurance premium rates change annually and how can one make a smart choice at the time of insurance renewal:
Components of car insurance premium
As per the Motor Vehicles Act, 1988, car owners are mandated to purchase “compulsory” insurance for their car, to secure the compensation for Death, bodily injury and/or property damage of a third party caused by traffic accidents. This mandatory component is termed as Third-party (TP) insurance and the premium for this is completely determined by the IRDAI and is periodically updated every financial year.
Considering the scope offered by the third party insurance cover (limited to third party liabilities only) however, car owners need additional cover to financially protect themselves against any damages. Such covers are known as Own Damage (OD) covers and offered by insurance companies to offset liabilities occurring from damage to customers’ own vehicle or major assemblies like the engine during situations like a flood.
Both these components together constitute the bulk of the insurance premium with a small amount contributed by the cost of Add-ons that may include a Personal Accident Cover and various Legal Liability covers to owner driver, named & unnamed passengers etc.
Factors influencing the cost of different components
IRDAI revises the applicable premium for private registration cars based on the cubic capacity (cc) of the engine equipped in them. Cars having engines of a capacity below 1000cc enjoy the lowest premium while those with engines above 1500cc attract the highest third party premium that is more than three times that of the former.
Commercial registration cars have a slightly different rate structure in the sense that the third party premium is determined by the passenger capacity of the vehicle or engine capacity, whichever is higher. The new breed of Electric Vehicles (EVs), however, enjoy a much lower third party premium. This is due to the incentive program by IRDAI. Lower third-party premiums are a way of incentivizing car owners for choosing an environmentally friendly vehicle and encouraging other buyers to consider opting EVs over fuel cars to reduce carbon footprints.
Own Damage premium on the other hand is determined by a multitude of factors including the age of the vehicle, which in turn decides the Insured Declared Value (IDV), cubic capacity of the vehicle, geography and the selected add-on insurance cover opted for by the customer.
Add-on insurance covers like Engine cover, Key Protect, Fuel Adulteration cover, Tire & Rim cover, Zero Depreciation cover and Return to Invoice (RTI) cover are amongst the popular ones offered by most General Insurance companies. These add-ons have different pricing based on factors such as the car model-specific risks.
Additionally, the previous claim history of the car owner also plays an important role in the insurance premium. In case of zero accident history in the previous insured period, a car owner is eligible for a No Claim Bonus (NCB) amounting up to 50 percent of the own damage premium. This will help provide a discount on insurance premium thus lowering it further.
Change in car insurance premium is determined by these multiple factors. It is therefore important to understand the pricing details of your next car insurance and choose wisely so as to enjoy a hassle-free car ownership experience.
The author, Rakesh Jain is CEO at Reliance General Insurance Co. Ltd. The views expressed are personal
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