Scrappage policy may lower your car insurance premium
PremiumThe policy, which the govt has been mulling since ’16, is necessitated by the fact that older vehicles cause more emissions
Older vehicles are not only more hazardous but also carry a greater risk of breakdowns and accidents. They also lead to more pollution. In this piece, we take a look at whether a scrappage policy can affect your car insurance premium.
The scrappage policy aims at taking old vehicles off the roads. Vehicles beyond an age are compulsorily to be scrapped under the statute. Such policies currently exist in some states in differing forms. The national-level policy that is now being envisaged contemplates a 15-year life span for vehicles.
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2 min read . 06:48 PM ISTR.K.T. Krishnan, country head - motor claims, Royal Sundaram General Insurance, said that the government of India has been considering a policy to scrap vehicles that have reached their end of life (typically 15 years for a commercial vehicle and 20 years for a private vehicle) since 2016 and the policy draft for scrapping facilities was notified on 15 March.
The policy is necessitated by the fact that older vehicles cause more emissions.
“Car owners who scrap their vehicles will get about 5% of the value as scrap value and will also get some favours in road tax and registration costs," said Krishnan.
The impact of vehicle scrappage on insurance will be known as the implementation of the policy evolves into action. Insurers will prefer safer vehicles to insure and this will have an impact on third-party claims. Any third-party premium reduction on this score will have to be seen, as a third-party premium is fixed after considering the industry experience.
Aatur Thakkar, co-founder and director, Alliance Insurance Brokers, said that old vehicles contribute little to the insurance pool since they carry only third-party insurance.
In April 2007, the insurance industry had created a separate pool for third-party insurance, managed by the General Insurance Corporation of India (GIC Re).
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THIRD-PARTY CLAIMS
Despite premium adjustments, third-party claims continue to bleed the pool, carrying an incurred claims ratio in excess of 140% and the major contributor to these losses are older vehicles. Statutorily taking older vehicles off the road will reduce claims and thus reduce the stress on premiums.
“Therefore, it can be expected that in the near future, this move will stabilize third-party premium rates and in the long run, even result in a downward adjustment of premiums," said Thakkar.
Claims ratio is a metric to measure the trustworthiness of an insurer. It generally helps a policy buyer understand the likelihood of the insurer compensating him/her for their vehicle’s damage or loss.
When the government decides to compulsorily take old vehicles off the road through the scrappage policy, such a move also includes some incentive towards the purchase of new vehicles through concessional loans, tax rebates and the like. This would result in a greater investment of the public at large in new vehicles, most probably low- and mid-segment makes and models. This will augment the motor portfolios of insurance companies.
Such an increase in volumes can also cause a reduction in own damage (OD) premium rates, especially since insurance companies have a greater appetite for new vehicles in these segments.
The OD component of an insurance policy helps protect you and your insured vehicle from your own damage. It covers your vehicle against any accidents like fire, theft, etc.
REPAIR COSTS
Generally, in case of an accident, an OD cover compensates you for the expense to repair or replace parts of your damaged car. “Therefore, the scrappage policy will not only bring down accidents and pollution, it will also bring down insurance premiums," said Thakkar.
Besides, scrappage can provide insurers access to some good reconditioned parts and that can help reduce the cost of replacement.
“At the same time, any reduction in the salvage value of a vehicle that has met with an accident will adversely impact the insurer. Thus, the possibility of any change in premium will be known only as scrapyards stabilize their operations," said Krishnan.
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