How is auto insurance premium calculated?
Auto insurance is essential for every car or bike, as it covers the expenses of vehicle damage, injuries to other drivers, passengers and pedestrians. More importantly, it is a legal requirement to have valid auto insurance. If how your premium was calculated seems like a mystery to you, here’s everything you need to know.
There are two types of insurance that are offered in India:
- Third-party insurance: This policy only covers expenses accrued by the third party (the other party) in case of an accident. These include damage to the car and driver. It, however, offers no protection to you or your vehicle.
- Comprehensive insurance: This auto insurance policy covers expenses incurred in case of damage to the insured car and to the other vehicle(s) and people.
Do remember that third-party insurance is mandatory, and it is illegal to drive a car or two-wheeler without it.
Auto insurance policies usually comprise the following elements:
- Insured Declared Value [IDV]
Every car has a value that the insurance company determines. This is done by calculating depreciation based on the age of the car. Here is the table to give you a brief idea.
|Age of the vehicle||Rate of depreciation (in %)*|
|Less than 6 months||5%|
|6 months – 1 year||15%|
|1 – 2 years||20%|
|2 – 3 years||30%|
|3 – 4 years||40%|
|4 – 5 years||50%|
*As per Indian Motor Tariff
By using this guideline, the Insured Declared Value or the current value of the automobile is calculated. This is the maximum amount that you can claim in case of a total loss or irreparable damage to your car.
- No Claim Bonus (NCB)
The insurance premium for the following year will be discounted in case you have not made any claim for damage in the previous year. This is a way in which the insurance company rewards and incentivises good driving. But, beware because you will be penalised in case of a claim arising out of incidental damage.
- Capacity of the engine
The cubic capacity is the size of the engine. This affects the insurance premium that you are charged for a third-party insurance policy and is known as liability premium. It is important to know that the age or dimensions of the car do not affect this amount. It is the minimum amount that you have to pay as per the Insurance Regulatory Authority of India.
The table below will tell you what your premium liability will be:
|Private car (Engine Capacity)||Third-party premium|
|Less than 1000cc||Rs.2,055|
|Greater than 1500cc||Rs.7,890|
- Personal Accident Cover
This is the final component of car insurance. Personal accident cover provides compensation in case the owner or driver meets with a fatal accident or is permanently disabled. This is included by default in your auto insurance. You can add personal accident cover for additional passengers as required. But, remember that this will increase your insurance premium.
So, calculating your auto insurance premium includes factoring in these four components.
The steps to determine the premium are as follows:
- Calculate the Insured Declared Value of the car based on the period of ownership.
- Multiply the Insured Declared Value by the pre-determined premium rate as indicated by the insurer.
- Add the cost of add-on insurance such as additional personal accident coverage.
- Deduct the No Claim Bonus, in case no claim has been accrued in the previous year. (This does not apply to a new car).
- Deduct any discounts or apply promotions being offered.
- The amount you’re left with is your premium amount.
Automobile insurance can seem like tricky business, and as a customer you must shop around to get the best deal. Apart from these factors, things such as your driving history and credit history also influence what your premium rate will be. Insurers also offer promotions from time to time, so keep your eyes open for the best offers. Now that you knew how the premium is calculated, you can be better prepared to have a detailed discussion with your agent.