The car buying experience is set to get cheaper from 1st August 2020- as Long Term Motor Vehicle Insurance Package no longer mandatory
Insurance Regulatory and Development Authority of India (IRDAI) has withdrawn permission for motor long-term cover effective from 1st August 2020. This move will result in on-road prices of cars and bikes to come down. While third party insurance is still a mandatory requirement for 3 years for four wheelers and for 5 years for two wheelers.
Introduced in September 2018, the IRDAI has now noted several discrepancies in the efficacy of these long term policies and hence announced its withdrawal. The mandate was issued following a Supreme Court order so as to increase safety for both pedestrians and other motorists. It directed buyers to purchase a combined insurance pack which included own damage and third party insurance for 3 years for cars and 5 years for two wheelers.
This third party insurance cover has been rolled back and from 1st August 2020 it will be revert to the mandatory 1 year, own damage insurance cover for both four and two wheeler vehicles. Even if the customer so desires, they will not be able to take out a long term own damage policy.
Reasons for its Withdrawal
There are several reasons why the IRDAI has decided to withdraw this long term motor vehicle insurance policy. Firstly, the package policies are challenging due to affordability for a large number of vehicle buyers. Secondly, forced selling due to financial interest, which was linked to loans was also high.
Finally, in the event of deficiency of service, the policy holder was stuck with the same insurance company for a long term and no flexibility of change. There was also no uniformity in ‘no claims bonus’ structure which caused some confusion and dissatisfaction in the mind of the policy holders.
Post Withdrawal Impact
This move will have an impact on motor vehicle insurance in a number of ways. For starters, the gross premium being underwritten will see a reduction. There are also large numbers of two and four wheeler who continue to ply on roads without insurance. Without this mandatory long terms cover at the time of purchase itself, renewals could be significantly reduced.
Without long term cover costs out of the picture, overall cost of vehicles will come down post 1st August 2020. This could prove to be advantageous for the auto industry which has been going through several months of slow down. The current coronavirus situation further impacted the situation while this roll back could now see vehicle buyers once again heading to company showrooms.